Expectations and Efficient Markets - Geothermal Corp. just announced good news: Its earnings have increased by 20 percent. Most investors had anticipated an increase of 25 percent. Will Geothermal's stock price increase or decrease when the announcement is made?
In general, in this type of scenario, one would expect the stock price to decrease as it did not meet the expectations of investors. The value of any given stock is largely based on future expectations of growth. When those growth targets are not met, investors become dissatisfied, despite the fact that earnings still increased by 20%.
More info to help explain the psychology behind it all:
The standard approach to valuing equities is straightforward and involves two basic elements?earnings growth and discounting. To appreciate the role of these elements, it is useful to ask why investors hold stocks. The answer, of course, is that they expect some future income, either in the form of ...