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When we are studying the stock price reactions to earnings announcement, why do we need to...

When we are studying the stock price reactions to earnings announcement, why do we need to know analysts’ earnings forecast consensus?[answer in less than 50 words]

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Answer #1

Stock market is always forward looking and the price of the stock is the discounted future cash flows from that particular stock. Thus, whenever there is higher expectations of earnings for the firm ,there would be corresponding rise in stock prices and vice versa. Earnings estimates provide investors’ opinions of many factors like growth in sales, product demand industry environment ie competition, profitability and efficiency. Stock prices change as these expectations change or are wrongly proved by the figures.

The best proxy for markets expectation is the analysts consensus estimates which is the most practically feasible which can be compared to the actual earnings after which the stock price adjusts.

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