THE FINANCE GHOST: The beauty (and danger) of competition
When a company does unusually well, the level of competition increases — but the result is that profits that have been exceptional become merely adequate
If ever you fall into the trap of believing that markets are efficient things that are always right about where stocks should be trading, just take a look at certain moves in the US market in response to earnings. In recent years, we’ve had some truly crazy days in the tech sector, with several of the biggest companies in the world dishing up moves of 20% or more in after-hours trading when earnings are released. Recently, this seems to be happening in the retail sector in the US as well.
It always comes down to roughly the same thing: the expectation gap. When the market is expecting one thing and the company in question delivers something different, you have a gap that needs to close in one direction or the other. When earnings are well ahead of expectations, the share price is likely to have a good day. Interestingly, a disappointing update always seems to be punished more severely than a strong update is rewarded. What’s that old saying about the bulls taking the stairs ...
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