Stockmarket Sherpas – The Good, The Bad & The Unexpected…

“Expectations get baked into pricing.”

By Mike Williams

The markets have been engaging in a bit of give and take, meandering over the same price range for months now.

And a long list of expert analysts are taking their best shot at knocking down expectations as this next earnings season gets underway.

Interestingly, analysts in their own unique way also tend to operate as a crowd. All humans have that urge to be part of a group – it’s hard-wired into our natures.

What we already know is that when crowd sentiment grows negative, surprises to the upside tend to be in the offing for patient investors.

Likewise, history suggests that the more negative the analyst community becomes as we prep for an earnings season the better the outcomes.

Why?

Because expectations get baked into pricing.

When crowd sentiment grows negative, surprises to the upside tend to be in the offing for patient investors.

With low expectations, surprise reactions in the face of negative results are burned away, hence risk is reduced…. And the upside becomes the surprise.

In essence, as negative outlooks ratchet down the numbers, prices and expectations are set in the marketplace.

It becomes a domino effect as the analysts all crowd around the same price range.

In the last four weeks that analysts have lowered estimates on 697 companies in the S&P 1500.  And if you’re a slow math guy like me, that’s nearly half of the index! 

But considering my point above, that might actually be a good thing. 

BeSpoke writes: “Sentiment going into an earnings season is usually a contrarian indicator. Since 2009, analyst sentiment heading into earnings season has been inversely correlated to how the market actually performs during the following six weeks of earnings season itself.” 

While analysts lowered estimates for 697 companies, the data shows they raised estimates for only 305 in the S&P 1500.

I can not see the future. What I can see is the correlation and the potential.

And I’m patient.

More Sherpas:

Just A Little Patience – Markets don’t burn investors, behaviour does. Read

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