It’s currently the season when listed companies release their earnings en masse. Before diving into specific numbers, I’d rather use this moment to rethink a question that seems simple but is actually often misunderstood: does company performance always positively correlate with stock price?
Intuitively, the answer seems obvious. Better earnings mean stronger profitability, and stock price — especially the P/E ratio — is itself an expression of company value. So in an “ideal model,” improved earnings → more valuable company → rising stock price — this logic holds. But in reality, the stock market doesn’t always follow this linear relationship.
Stock price is certainly related to earnings, but what it reflects is often not just facts that have already occurred, but imaginations about the future. For example:
- Whether the company is making more aggressive investments
- Whether the investment direction aligns with mainstream market narratives
- Whether management is perceived as “ambitious” and “driven”
- Whether the company has been placed within a larger growth story
If a company consistently pursues aggressive investment strategies and appears to be heading in the “right direction,” stock price may continue to rise even if short-term earnings aren’t outstanding. In this case, the driving force behind the price increase comes not entirely from current profits, but more from — everyone’s expectations about its future.
When “expectations” dominate, earnings actually become less important. This leads to a phenomenon that often confuses people:
- Earnings beat expectations, yet the stock doesn’t rise or even falls
- Earnings decline, but the stock price isn’t significantly impacted
The reason isn’t complicated. When the market focuses more on “the future story,” the importance of short-term earnings naturally gets diluted. In some phases, rapid earnings expansion might even be interpreted as a contraction in investment intent. Because profits mean “harvesting” rather than “continuing to invest.” And when market consensus has already been consumed by expectations about the future, the marginal stimulus that earnings themselves can provide drops significantly. Conversely, as long as the market still holds expectations for the company on other dimensions, short-term earnings deterioration won’t necessarily be interpreted as substantive bad news.
Many people notice that around earnings announcements, stock prices often experience intense short-term fluctuations. But these fluctuations reflect more the hedging and correction between expectations, rather than a sudden change in value itself.
- Some bet early on “beating expectations”
- Some worry about “buy the rumor, sell the news”
- Some rebalance during extreme sentiment
- Some are forced into decisions by volatility
As a result, within a very short timeframe, prices are driven by massive emotions, quickly deviating from rational ranges.
This kind of short-duration, high-intensity volatility actually hits individual investors very hard. Because we tend to overestimate the decisive impact of earnings on stock price, whether upward or downward. Once you act during such volatility, it’s easy to buy at the most optimistic emotional peak, or sell at the point of panic release. Both scenarios cause your actions to deviate from your original investment strategy. Buying at the peak means enduring longer price fluctuations before you can verify whether your judgment was correct; selling at the low often means prematurely giving up profits that should have been yours.
From this perspective, I’m more inclined to understand the intense volatility after earnings announcements as a temporary release of emotions. Rather than participating in the game at the most chaotic moment, it’s better to wait for prices to stabilize and then observe: which side’s expectations ultimately prevailed, and whether the market’s core judgment about the company has truly changed. After all, what truly determines medium-to-long-term trends is never a single day’s numbers, but the consensus that remains after emotions have dissipated. Perhaps understanding this is more important than simply watching whether earnings “beat expectations.”