In the high-stakes world of Wall Street, earnings season is like the Super Bowl. Companies release their quarterly results, and the market holds its breath: Will they “beat” analyst estimates? But what if those estimates are rigged from the start? To navigate this minefield, savvy traders need to focus on the technicals over hype, writes AJ Monte, founder of StickyTrades.
Suspected manipulation of earnings estimates by analysts isn’t just a conspiracy theory. It’s a well-documented tactic that distorts reality, inflates short-term gains, and leaves retail investors holding the bag when the truth emerges.
Earnings estimates are forward-looking predictions made by financial analysts about a company’s future profits, typically expressed as earning per share (EPS). Why do they hold such sway? Simple: The market rewards “beats” and punishes “misses.” Studies show that companies beating estimates see an average stock price jump of 1%-5% immediately after announcements, while misses can trigger drops of similar magnitude or more.
This reaction stems from the perception that beating estimates signals strong management and growth potential. But here’s the catch: If estimates are artificially low, “beating” them becomes a scripted win, masking underlying issues and artificially boosting stock prices.
Analysts often start with rosy forecasts, then revise them downward as reality sets in, while little attention is paid to the revisions. A study on “seemingly inconsistent” revisions found cases where analysts issue high initial targets but quietly adjust earnings forecasts to align with achievable numbers, preserving the illusion of outperformance.
It’s not just analysts. Companies manipulate underlying earnings to hit these estimates. Tactics include deferring expenses, accelerating revenue recognition, or cutting R&D to boost short-term profits.
As a veteran trader for more than 43 years, I believe investors are being trapped into overvalued positions that they believe will pay big returns for many years to come. However, we must learn from the past by focusing on the charts more than the analysts’ forecasts. The price action will tell you when the price is about to plunge because when the news turns bad, there will be insiders who will begin to sell, and they will sell with momentum.
In short, don’t get fooled by the earnings illusion. Dig deeper or risk watching your portfolio be manipulated right out from under you.
