Do stock prices rise when earnings of a company fall?

First of all you cannot predict stock price on one factor stock price generally rise when profit goes up or company got good work or somethign good news about the policy of the government

The stock price is normally based upon what investors expect future results will be for the company.

If actual earnings are better than expected that is an indication that expectations of future results have been too low. Absent any other news, this would usually cause investors to raise their expectations which in turn normally increases the stock price.

Both your lecturer and eHow have oversimplified the situation. In general I prefer the explanation of your lecturer, but there are a lot of exceptions.

There can be a lot of reasons for a decrease in earnings. Some companies have strong seasonal trends and earnings are expected to decrease at some point every year. A company that sells Christmas tree lights will have higher earnings in the Oct-Dec quarter than in the Jan-Mar quarter.

One time events can also have a huge impact on earnings. I remember when Dupont sold off Conoco, a significant part of the company. In the quarter that the sale took place Dupont had huge earnings due to the revenue generated by the sale. The next quarter earnings were way down but there was no significant change in the stock price. Investors knew earnings would be way down and the stock was priced accordingly before earnings were announced. Similarly, if a company shuts down a factory for a month to modernize it, investors will expect lower earnings in that quarter. However since the modernized factory will be more efficient, investors probably will expect higher earnings in future quarters, so the stock price easily could increase.

When earnings go down unexpectedly, or without any obvious cause, eHow is right, the stock price will probably fall.

In general...if earnings fall...especially by 30% which is a huge number...the share price for the company should decline.

However, say the shares have already declined a lot because it is expected that the company will have a financial report which shows a disastrous drop of earnings of 40%. Rumours of such a disaster would plummet the shares prior to this announcement.

BUT the real numbers reported in the financial report show the true drop in earnings to be "only" 30%, ie. not as bad as expected, well there may be a few days of recovery with the stock rising because some investors (speculators really) may think the stock has been devalued too much and there will be a short term boost in price on that announcement.

So while the loss of earnings was not as great as expected and the stock rose slightly because of it...this is still a financially unsound company and probably the stock will continue to fail a day or two later.

It is expectations that often drive the price...not whether the the earnings rose or fell...the opposite is true as well with exceeding expectations. Let us say a company exceeded expectations in earning for the last quarter but projected normal earnings in the next quarter...the share price could fall (investors like bigger and bigger profits :)

The question is assuming that the stock price fell substantially when a forecast fall in earnings was announced/perceived . This would lead to an "oversold" situation ,in which a flood of shares would be put in the market , but on results being that the fall in earnings was not as bad as forecast then the shares would be bought back and rise as a result. This situation will occur when a stock is short-sold by hedge funds ,with a view to buy stock at a lower price.

Recognising an oversold stock can be rewarding but requires a bold,independent and individual approach.

Hence the proverb "It`s an ill wind that blows no-one any good."

The day to day changes in price really have very little to do with the company in terms of its operations. Obviously the company performing well will increase the market value of the stock, dividends, management, changes in the business model can drive the market price. When the company does an offering, either secondary or as an IPO, they are allowing individuals to buy a part of that company. So the initial sale of that stock will determine how much capital they actually bring in. After that it is all supply and demand. Companies can buy back stock to increase the price in an effort to keep the owners happy. Then when the price recovers they can sell that stock back into the market or they can use it as employee compensation in terms of a stock based bonus.

Earnings rise and fall based on the expectations. If the company was expected to report a decrease in earnings by 40% but instead reported a decrease in only 30% it beat expectations and thus stock price rises.

I've been trying to figure that out for the last 58 years.

1) The market is not always rational

2) Other factors could influence the price

A) A rise or fall in the price of the raw materials that they buy

B) Interest rates

C) They could have received an pffer to sell the company Or buy a company

D) They could be buying back many of their shares.

E) They could be bringing an exciting new product on the market.

Nothing happens in a vacuum.

I'm not an authority on this, but the given answer suggests that although earnings decreased, they were still better than expected. Therefore, the stock may have been priced as though things were worse than they actually were, making it look cheap to investors.

I dont agree with that answer, necessarily. If the earnings have dropped, this could be a signal that the company is falling off a cliff, and the stock prices might drop

greatly since people avoid buying stocks in a dying company and they may take their losses and sell the stocks they have to salvage what they can.

Stock prices are not necessarily related to earnings. If the market has an increase in interest in a stock, the price can rise highly with no obvious relation to earnings.

1