Goldman Sachs – Earnings Up, Stock Down…Happens all the Time

Big news this morning is that Goldman Sachs beat earnings forecasts by a large margin. 

Earnings weren’t just “up,” they were way above what analysts were “expecting.”

Wish you bought the stock yesterday before the announcement? Well, as of right now the stock is down -1.75%.

It may seem odd, but I’ve seen this so many times that it doesn’t surprise me anymore. Bad earnings – stock is up. Good earnings – stock is down. It is like a total crap shoot. The content of earnings announcements usually has nothing to do with what the stock does on that day.

Is the market crazy?

Does this mean the market is broken? Absolutely not. It is another reminder of how well the market works, and why you shouldn’t try to pick stocks to beat the market.

Information often gets priced into stocks very quickly. Regardless of what the analysts had in their reported “expectations,” the market apparently already knew Goldman was going to have huge earnings come out today. Because the effect was already baked into the stock price, when the announcement actually happens, it doesn’t effect the stock. On top of all this, there may be information in the earnings announcement that indicates future expectations. This often has a much more powerful effect on the stock price than the current earnings.

This is the way is always works

I want to reiterate, this happens all the time. It is why stock picking is such a tricky business that usually fails. The financial markets are an extremely complex system, and information is usually already baked into stock prices long before it is released. It isn’t just about what you know about a company, it is about what everyone else knows as well.