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Earnings Announcements and Market Reaction

Texas Instruments Inc.’s earnings slid 29% in the first quarter on a 7.7% rise in revenue, according to the WSJ Update on April 15 1996. TI's earnings of 84 cents a share were well below the Wall Street earnings consensus of $1 a share.

 On the same day, TI's stock closed at $52.25, up 87.5 cents.

 Q How can earnings go down and stock price go up? (Answer is below)

 Answer

One possible explanation is that the market - the average investor - was expecting an even higher amount than was announced, other things being equal.

IBM Corp. reported better-than-expected results for the first quarter and boosted its quarterly dividend by 40%, despite weak demand for personal computers in the U.S. and continuing price pressures, according to the WSJ Update on January 17 1996.

Question

How can you have a "better-than-expected" earnings announcement and lower prices happening on the same day? 

Answer

To determine the impact of the earnings announcement on stock prices, you need to be able to isolate news from other potentially important events. In this illustration, it is not possible to do so because a lot of things happened during the day. For one, the company did announce an increase in regular dividends. Later in the day G. Richard Thoman, IBM's chief financial officer, warned that "the company's [profit] margins are under pressure" and said second-quarter profits would be hurt by currency fluctuations. The price did actually go up by over $3 immediately following the earnings announcement but went down in reaction to Thoman’s announcement.