Analyst Expectation

What Is an Analyst Expectation?

An analyst expectation is a report issued by an individual analyst, investment bank, or financial services company indicating how a particular company's stock will perform in the coming quarter.

Analysts provide guidance as to how they expect a company to perform. This is typically a range of values that a particular variable is expected to fall between. Examples include recommending investors to buy, sell, or hold a particular stock.

Key Takeaways

  • Analysts' expectations are how equity analysts predict that a company's financial situation and stock price should perform in the near- to mid-term.
  • These expectations are based on fundamental analysis, an inspection of financial statements, and comparisons to peers and competitors.
  • Analyst expectations can result in recommendations such as buy, sell, and hold for a stock.
  • Macroeconomic conditions and technical analysis may also be considered when forming a forecast.
  • If a company's actual results deviate from analysts' consensus estimates, the stock price can react strongly.

Understanding Analysts' Expectations

Publicly traded companies also issue their own guidance outlining expected future profits or losses. This forecast helps financial analysts set expectations, and can be compared to get a better idea of potential company performance in the upcoming quarter.

If a stock performs better than what analysts expected, it is considered to have beaten expectations or delivered stronger-than-expected results; the stock may also have been said to have beaten the street. However, if a stock doesn’t perform as well as analysts expected, it is said to have missed estimates. If the stock’s performance varies significantly from most analysts’ expectations, it can be called an earnings surprise, regardless of whether the stock beat or missed estimates.

Earnings surprises can strongly influence stock prices. Research shows that earnings surprises (either to the upside or downside) can cause a stock to move sharply and then continue to outperform or underperform the broader market, respectively.

How Analysts Create Expectation Reports

In order to create an accurate forecast of how a specific company’s stock will perform, an analyst must gather information from several sources. They need to speak with the company’s management, visit that company, study its products and closely watch the industry in which it operates. Then, the analyst will create a mathematical model that incorporates what the analyst has learned and reflects their judgment or expectation of that company’s earnings for the forthcoming quarter. The expectations may be published by the company on its website, and will be distributed to the analyst’s clients.

Often, companies want to collaborate with analysts to some extent to help them fine-tune their expectations in order to make them more accurate. Accurate expectations benefit the company, because when a stock misses expectations, share prices can fall. It can benefit the company even more, however, if the analyst’s expectation is low and the company beats it, because this can raise the price of shares. However, sometimes companies might try to use high expectations to drive a stock price up by giving investors the impression that analysts think well of the company.

Consensus Expectation

Multiple analysts will follow the same company and issue their own expectations of that company’s performance in the coming quarter. Each analyst covering a stock will use slightly different methods, have different assumptions, and use different inputs into their models. As a result, most people don’t base their securities purchasing decisions on the expectation of a single analyst, but consider the average of all the expectations issued by the analysts who follow that stock. This average is known as the consensus expectation.

Arriving at the consensus estimate is not an exact science and will depend on a variety of quantitative and qualitative factors, access to company records and previous financial statements, and estimates of the market for the company's products. Still, if a company misses or exceeds consensus estimates, it will often send the price of a stock tumbling or soaring.

The fact that different analysts working at different financial firms come up with different expectations is proof that forecasting is not an easy task, nor is it an exact science. This is why consensus estimates are thought to be more reliable than any single estimate.

Example of an Analysts' Expectations

As of Q2 2022, Apple, Inc. (AAPL) is covered by 38 analysts offering 12-month price forecasts for the stock. During this time AAPL stock was trading at around $150 per share, but with a median consensus target estimate of 190.50 (with a high estimate of 219.94 and a low estimate of 145.00).

This is based on a consensus earnings forecast of $1.16 per share based on an estimated $82.8 billion in worldwide sales. Given this, the consensus analyst recommendation at that time was a "Buy."

Why Are Analyst Expectations Important?

Analyst expectations are important because professional equity analysts will have more information, skill, knowledge, and resources to understand a company's financial situation and produce a stock valuation accordingly. The investing public, therefore, relies on the consensus of these analysts to make investment decisions.

Where Can I Find Analyst Estimates?

Many free financial websites or brokerage platforms will provide access to available analysts' expectations along with consensus estimates for a range of figures from the stock price, earnings per share (EPS), revenue, and net profit.

What Does It Mean to Beat Expectations?

If a company reports earnings that are higher than the consensus expectation of analysts, it is said that the beat expectations (or "beat the Street"). Often, the stock price will rise sharply in response to beating expectations, and in proportion to how much the expectations were exceeded.

What Do Buy, Sell, and Hold Ratings Mean?

Analysts' expectations often are paired with ratings or recommendations. These are often issued in the form of buy/outperform, sell/underperform, or hold/market perform from equity analysts working at sell-side firms such as investment banks. These are intended as a guide to clients and other investors to help steer stock picking decisions.

Stock Recommendation Chart
Stock Recommendation Chart.

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  1. Kinney, William, David Burgstahler, and Roger Martin. "Earnings surprise “materiality” as measured by stock returns." Journal of Accounting Research, Vol. 40, No. 5. 2002, Pp. 1297-1329.

  2. CNN Money. "AAPL Stock Price Forecast."

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