Finally, I write something that isn’t about the war in Iran!
We kicked off earnings seasons last week, and this is always an interesting time because companies’ price moves depend more on how it does against expectations, rather than how they do in general. Picture it like a teacher that grades a student based on ability rather than standardized testing. If the teacher expects a student to do well, it will be a lot harder for them to impress. If the teacher expects them to fail, it is easier to impress.
Stocks don’t move simply because a company is doing well. They move based on whether expectations were too high or too low.
Companies With Elevated Expectations
There is a group of companies where expectations are incredibly demanding.
This includes names like Nvidia, Microsoft, Amazon, Meta Platforms, and Apple.
Across this group, analysts have steadily raised earnings estimates over the past several quarters, largely driven by expectations around artificial intelligence, cloud growth, and continued margin expansion.¹
The challenge is that when expectations are this high, companies are not rewarded for simply doing well. They are expected to deliver exceptional results. Even a modest miss, or slightly cautious forward guidance, can lead to outsized downside reactions.²
The “Quietly Expensive” Group
There is another category of companies that are not always framed as “hype” stocks but still carry elevated expectations due to consistent outperformance.
This includes Costco Wholesale, Eli Lilly, Netflix, Visa, and Chipotle Mexican Grill.
These companies have delivered steady results, which has led analysts to gradually revise expectations higher over time.³ As a result, they face a similar dynamic: it is not enough to beat expectations, they need to meaningfully exceed them to continue justifying current valuations.
Companies With Lowered Expectations
On the other side of the spectrum are companies where expectations have already been reset lower.
Names such as Nike, Starbucks, Target, Boeing, and Walt Disney Company fall into this category.
Here, analysts have reduced forecasts in response to slowing growth, margin pressure, or company-specific challenges.⁴ Investor sentiment tends to be more cautious, and in many cases, negative.
That dynamic creates a different setup. These companies do not need to deliver perfect results. Stabilization, modest improvement, or even “less bad” outcomes can lead to positive stock reactions.
Why Market Reactions Matter More Than Results
The most important takeaway from earnings season is that outcomes are relative, not absolute.
A company with strong results can see its stock decline if expectations were too high. Conversely, a company with weaker results can rally if expectations were sufficiently low.
This dynamic reflects a core reality of markets: prices adjust based on the difference between expectations and reality, not simply the quality of the results themselves.⁵
What I Am Watching This Earnings Season
Over the coming weeks, a few themes will matter most:
- Whether companies tied to artificial intelligence can justify the level of growth currently priced into their valuations
- Whether consumer demand remains resilient, or begins to show signs of softening beneath the surface
- Whether companies that have faced pressure begin to stabilize, creating opportunities for upside surprises
Small shifts in any of these areas can lead to meaningful changes in market leadership.
