2-2 Why Do Share Prices Move?
A page sorting out why share prices move on future expectations and outside conditions, not only on current earnings
2-1 established that a share is part-ownership of a company. The next question is why do share prices move as much as they do. A share price does not simply mirror today's figures.
- Share prices move not only on current earnings but on how expectations for the future have changed.
- For the same earnings report, the reaction differs depending on whether expectations going in were high or low.
- Good earnings can still be followed by a fall, because what is being judged is the gap against prior expectations rather than the figures alone.
- In the short term, flows and news matter too, but over long periods the company's substance tends to come through.
- The point is to read a price move as a change in how the company is valued, not as mere ups and downs.
1. Prices move on both "today's figures" and "expectations ahead"
Share prices are not driven by current earnings alone. The market is always looking ahead to how this is likely to turn out. So the same earnings report draws a different reaction depending on whether expectations going in were high or low. It helps to think separately about current figures, prior expectations, outside conditions, and short-term flows.
What matters is not deciding why a price moved from a single piece of news. For identical earnings, the reaction changes depending on whether the market had hoped for something better or outside conditions have deteriorated.
2. Good earnings can still fall, because the gap is what is judged
The numbers were good but it fell anyway is a common experience with equities. That happens because what is being judged is the gap against prior expectations rather than the figures themselves. Conversely, weak numbers can be followed by a rise if something even worse was already priced in.
3. Next: how to sort out the reason a price moved
Over short periods, news, flows, and the general mood of the market can dominate. Over long periods, though, what tends to show up in the price is how much profit and shareholder return that company can generate. So it is more sensible not to judge a company's value from a short-term price reaction alone.
The feel to take away here is reading a share price as a change in how the company is valued rather than mere ups and downs. Next, 2-3 Sorting out why a price moved splits price movement into the whole market, group factors, and company-specific news.