Key Takeaways
- The Street expectation is the forecasts of a company’s earnings and revenue made by securities analysts.
- Failing to meet Street expectations can lead to sharp stock price declines.
- Beating Street expectations often results in stock price surges.
- A strong company outlook can soften reactions to missed expectations.
- Market reactions are influenced by the size of the earnings surprise and current trends.
The Street expectation is the average estimate of a public company’s quarterly earnings and revenues. It is set by the forecasts of securities analysts. The Street expectation is a closely-watched number that becomes prominent during the period when most public companies report their results. The term comes from the fact that analysts of the biggest brokerages are typically based on Wall Street in the U.S. and Bay Street in Canada.
The Street expectation is also known as an earnings estimate or earnings expectation. Consensus estimate is another synonym, but it is rarely used.
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How Street Expectations Affect Stock Prices
Investors’ reactions to a company that misses Street expectations are often negative and can trigger a substantial decline in the stock. Conversely, a company that beats expectations can generally expect to be rewarded with an appreciation in its stock price.
A company needs to beat the average analyst forecast for both sales and earnings per share (EPS) – or the top line and bottom line – to exceed Street expectations. A miss on either the average revenue number or the EPS forecast would count as falling short of expectations.
Factors that influence the magnitude of price movement in the underlying stock when a company exceeds or misses Street expectations (also known as a positive or negative “surprise,” respectively) include the extent of the surprise, the overall market trend (bullish or bearish) and the company’s outlook for the period ahead.
Analyzing Earnings Surprises and Market Reactions
In broad terms, the bigger the surprise, the bigger the market reaction. The reaction to negative surprises is typically more adverse than the favorable reaction to positive surprises. This means that a stock is generally likely to suffer a greater percentage decline if it misses expectations by a wide margin, compared to the percentage gain that can be expected if it exceeds the estimate by a similar margin.
During a strong bull market, stocks that beat expectations often surge in price. When experiencing a dismal bear market, stocks that miss expectations often endure precipitous price declines, while stocks that beat expectations in bad times record muted gains.
Market reaction to an earnings hit or miss can also be dictated by the company’s outlook. The negative reaction to an earnings miss may be tempered by a strong outlook, while the positive reaction to an earnings beat may be negated by a poor outlook. The forward price to earnings (forward P/E) is a measure of the price-to-earnings (P/E) ratio that uses forecasted earnings to guide a company’s future outlook.
The Bottom Line
The “Street expectation” or earnings estimate reflects the average analyst forecast of a company’s earnings and revenues. It is crucial for investors during earnings season. Companies that miss or exceed these expectations can experience significant stock price movements. How much the stock price moves depends on the size of the surprise and the overall market trend.
Failing to meet Street expectations can negatively impact stock prices, though this impact can be softened if a company has strong expectations. However, the market typically reacts more negatively to disappointing results than positively to surpassing expectations. This is especially true in adverse or bear market conditions.