DEFINITION of 'Street Expectation'
The average estimate of a public company’s quarterly earnings and revenues, derived from forecasts of securities analysts who provide research coverage on the company. The Street expectation is a closely watched number that assumes prominence during the period when most public companies report their results. The term is derived from the fact that analysts of the biggest brokerages are typically based on Wall Street in the U.S. and Bay Street in Canada. “Street expectation” is also known as “earnings estimate” or “earnings expectation”. Another synonym, “consensus estimate", is seldom used nowadays.
BREAKING DOWN 'Street Expectation'
Investors’ reaction to a company that misses Street expectations is often negative and can trigger a substantial decline in the stock. Conversely, a company that beats expectations can generally expect to be rewarded with an appreciation in its stock price.
A company needs to beat the average analyst forecast for both sales and earnings per share (EPS) – or the top-line and bottom-line – to exceed Street expectations. A miss on either the average revenue number or EPS forecast would count as falling short of expectations.
Factors that influence the magnitude of price movement in the underlying stock when a company exceeds or misses Street expectations (also known as a positive or negative “surprise”, respectively) include the extent of the surprise, the overall market trend (bullish or bearish) and the company’s outlook for the period ahead.
In broad terms, the bigger the surprise, the bigger the market reaction. The reaction to negative surprises is typically more adverse than the favorable reaction to positive surprises. This means that a stock is generally likely to suffer a greater percentage decline if it misses expectations by a wide margin, compared to the percentage gain that can be expected if it exceeds estimate by a similar margin.
In addition, during a strong bull market, stocks that beat expectations surge in price. During a dismal bear market, stocks that miss expectations endure precipitous price declines, while stocks that beat expectations record muted gains.
Market reaction to an earnings hit or miss can also be dictated by the company’s outlook. The negative reaction to an earnings miss may be tempered by a strong outlook, while the positive reaction to an earnings beat may be negated by a poor outlook.