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Bad News Inc. just announced a decrease in its quarterly earnings, yet stock price increased. Is...

Bad News Inc. just announced a decrease in its quarterly earnings, yet stock price increased. Is there a rational explanation for the phenomenon?

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Answer #1

The share markets are always futuristic so it discounts not just the current earnings but also future earnings. The prices of shares of a company can increase even after reporting bad quarter earnings because investors expect a turnaround in it's future earnings.

The current market events are already discounted in the share price of a company. It is believed that markets are forward looking and share prices can rally on the worst of news. This types of rally on bad news happens because the market believes that the worst is over for the company and it is expected to show a turnaround in it's future.

The share price of Bad News Inc. increased even after reporting a bad quarterly earnings because the market believes that this was an oneoff quarter and company will show a turnaround in future.

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