Article Review – Market Earnings
The Market’s Earnings Losing Streak May Be About to End
Key words and Definitions
- EPS – earnings per share, or the firm’s net income divided by the number of shares of outstanding stock.
- Shareholder wealth maximization – the primary goal of the financial manager which is equivalent to maximizing share price.
- Profit – the difference between revenues and expenses.
Summary: Key Points in the Article
The current earnings trend continues to surpass Wall Street’s expectations. Several recent earnings reports from firms as diverse as Citigroup and Delta topped analysts’ forecasts. Some experts attribute the result from low expectations that are not that hard to beat. If overall fourth quarter 2019 earnings decline it will be the fourth quarter in a row of falling earnings for the S&P 500.
However, most experts are forecasting a change in the first quarter of 2020 with consensus estimates forecasting earnings will be up by 5% over the first quarter of 2019. For all of 2020, analysts expect earnings to be 9.5% higher year over year. Almost all sectors are expected to have a good 2020 but large multinational firms are expected to perform particularly well. Some experts anticipate more record stock market highs for the year as earnings reports continue to show strong growth.
Thinking Critically Questions:
- How do earnings affect stock price?
- What is the P/E ratio?
- What should happen to stock price if analysts expect earnings to be $3 a share and they are $3.40 a share?
- How managers’ interests can be aligned to minimize the agency problem?