What is the significance of analysts consensus earnings estimates?
For an investor in common stock, knowledge of expected earnings, changes in expected earnings, and actual earnings is crucial for understanding stock price behavior. Earnings surprise is the key. Positive earnings surprises occur when actual reported earnings are significantly above earnings per share forecasts; negative earnings surprises occur when reported earnings are significantly below earnings per share forecasts. Both have lingering long-term effects. Consequently, a very rewarding stock market strategy is one that avoids stocks you believe will have negative earnings surprises or that have had negative earnings surprises. Selecting positive earnings surprise stocks before and even after the earnings come in may be similarly profitable. Even a strategy of simply selling after negative earnings surprises and buying after positive earnings surprises probably has some merit.
