Practical analysis for investment professionals
14 November 2014

Weekend Reads: Beating Expectations — Again and Again

Posted In: Weekend Reads

This week’s news that the European Space Agency successfully landed a probe on a comet for the first time in history serves as a testament to the spectacular scientific and technological advances humankind has achieved over the past century. Over the same period, however, our innovative spirit has been less apparent in the field of finance, though there’s no evidence that this is related to the just-identified stupidity virus.

Fittingly perhaps, our focus of late has been on mundane items like corporate earnings reports, which have been decidedly uninspiring. For close observers of the markets, that should come as no big surprise. Companies have gotten so good at managing earnings (and Wall Street) these days that when reporting season rolls around, it’s hard to ascribe any value to news that a company “beat” expectations. In fact, a review of quarterly data compiled by FactSet Research Systems reveals a recurring pattern in recent years. Companies guide Wall Street’s earnings and revenue estimates down over the course of the quarter and then clear the lowered bar when they report financial results. Markets cheer. Rinse and repeat.

As we enter the final weeks of trading in 2014, equity prices will likely be influenced by tax-loss harvesting and portfolio window dressing, as well as seasonal effects. Ultimately, however, earnings drive stock prices, and with valuations stretched, companies will need to find another gear to deliver on both the top and bottom line.

Below are some other stories that caught my eye in recent weeks.

Strategic Thinking

Capital Returns

High Profiles

  • eBay founder and crypto-insurgency benefactor Pierre Omidyar (New York)
  • Tony Robbins, from infomercial pitchman to C-suite consigliere (Fortune)

Big Business

China, Hong Kong and the “Through Train”

Wealth Disparity

  • Author Michael Lewis on extreme wealth: “When you control a lot more than your share of the Fruit Loops, there really isn’t much doubt about what you should do with them.” (New Republic)

The Fall of the Berlin Wall—25 Years Later

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
David Larrabee, CFA

David Larrabee, CFA, was director of member and corporate products at CFA Institute and served as the subject matter expert in portfolio management and equity investments. Previously, he spent two decades in the asset management industry as a portfolio manager and analyst. He holds a BA in economics from Colgate University and an MBA in finance from Fordham University. Topical Expertise: Equity Investments · Portfolio Management

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