A splendid quarterly profit and yet the share price falls. What seems like an outlandish logic of the stock market is not that complicated to understand. Such anomalies can be observed systematically during earnings seasons. Excellent quarterly financial statements do not necessarily follow rising share prices, and disappointing corporate balance sheets are sometimes rewarded with share price gains. But what sounds like a market misconception follows an inner logic.
Facts alone do not determine price movements in shares, but rather the complex interplay among facts and stock market expectations. The more the facts deviate from market expectations, the stronger the price reactions will be. More to the point, profit expectations are not everything. In many cases, the business prospects of companies are more important.
This also explains falling share prices, although analysts’ forecasts have been accomplished without any compromise. Secretly, the stock market has already expected more. For this reason, market participants are afraid that the success story could be coming to an end. After all, seemingly irrational price movements usually have a predictable background. As a result, shareholders who are aware of these correlations will achieve higher returns in the stock market.