From the course: Financial Modeling and Forecasting Financial Statements

Reflect new information in financial forecasts

From the course: Financial Modeling and Forecasting Financial Statements

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Reflect new information in financial forecasts

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As of 2025, there are over 4,600 companies with shares traded on U.S. stock exchanges. These companies fall under the jurisdiction of the Securities and Exchange Commission, the SEC, and they are required to publicly release financial reports every quarter. So each year, the SEC receives 18,400 financial report filings, that's 4,600 companies times four reports per year. These filings are typically preceded by a public press release of the company's net income. Now, with about 250 business days each year, that means that the average business day contains about 74 net income press releases. That's 18,400 press releases divided by 250 business days. So that's 74 earnings announcements on an average day. And earnings announcements cluster during certain periods, such as a few weeks after the end of a quarter. On those clustering days, there can be several hundred public corporate earnings announcements. So, how long does it take for financial analysts and sophisticated market investors to sort through the implications of this daily avalanche of earnings announcements? How long? Minutes. Just minutes. How can these market participants unravel the valuation implications of these earning announcements so quickly, especially given that on a busy day, dozens of such announcements can be dumped on them in just a few minutes? The secret is that financial analysts and sophisticated market investors don't wait until they read a company's earnings press release to do an analysis of the company. Instead, substantially in advance of the actual earnings announcement, financial analysts prepare earnings forecasts. They investigate a company's industry, the overall economy, and the little hints and signs that come out in the news from time to time. They use this information to create a model that predicts what the announced earnings will be. So when a company makes its earning announcements press release, the financial community already has an expectation of what that number should be. If the announced earnings are less than what was predicted, more often than not the share price goes down. And if the announced earnings are greater than the market expectation, the share price will probably go up. This phenomenon is a fact well established by accounting researchers. Now, the existence of a forecast benchmark prepared in advance makes it much easier and much quicker to interpret the actual results when they become known. Now, let's look at an example of the quick reaction to a public earnings announcement. On July 31st, 2025, Apple announced its financial results for the second quarter of 2025, the months of April through June. Apple reported total revenue for the quarter of $94 billion with the reported earnings per share of $1.57. So is this good news or is this bad news? Well, in just a few minutes, financial analysts had determined that this was very good news. Apple's share price quickly rose in after-hours trading. By the way, Apple releases earnings announcement after the market closes. Over the next week, as analysts parse through the good news provided by Apple, The value of Apple shares had increased by over 13%. Now, how could the financial analysts decide so quickly? Because they'd already done their homework well in advance and were ready with a forecast of what they thought Apple would report. The analysts had done their analysis and were expecting quarterly revenue to be $89.5 billion. So the announcement of $94 billion was good news indeed. Also, the analysts were expecting earnings per share of $1.43. The announcement of $1.57 earnings per share told them that Apple was generating even more profit than they had expected. With a financial model, a target, a forecast in place, it is much, much easier to interpret the actual numbers when they become available.

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