During this earnings season, a reader asked a question in my Substack Chat, roughly as follows:

How exactly should earnings data be interpreted, and how does Wall Street decide when to push up or sell off a particular stock?

Many people have a misconception that if earnings are good, stock prices should rise; if earnings are bad, stock prices should fall. If the world were that simple, investing would be far too easy.

In fact, after earnings reports are released, we often see strange trends where "good news is fully priced in" or even "good news turns into bad news".

To understand the logic behind this, you must first abandon the linear thinking of retail investors and comprehend the market's true rules.

▋ Learn to "Translate" Analyst Reports

First, you need to learn how to read sell-side analyst reports. You must understand their niche to correctly interpret their output.

Their salaries and bonuses are not solely dependent on the accuracy of their predictions, but rather more on the following three points:

1. Relationship with listed companies: If an analyst gives a company a very unfavorable "sell" rating, it's highly likely they won't be invited to that company's next earnings call or one-on-one executive meetings.

2. Relationship with buy-side clients: Who are their reports written for? For hedge funds and mutual funds (buy-side) that hold significant capital. These large clients are the true benefactors who bring trading commissions to brokers. Therefore, their research must serve the needs of these large clients, sometimes even packaging transactions that clients already intend to make with a reasonable fundamental narrative.

3. Not offending market consensus: If the market generally favors a stock and an analyst insists on issuing a contrarian report, even if they are ultimately proven correct, they won't receive much reward; however, if they are wrong, the risk of losing their job is extremely high. This often makes their views "lagging indicators"; they are better at refining and rationalizing existing market consensus rather than genuinely leading predictions.

Therefore, the most valuable part of a Sell-side report is never the "buy/hold/sell" rating or the target price.

Those are conclusions for laypeople. The most valuable content is within the report's body:

- Detailed financial models: These are built with significant time and effort, and you can use them to validate your own assumptions.

- Industry data and supply chain verification: They have the resources to do this groundwork, which is valuable raw material.

- Subtle shifts in management's tone: They can speak directly with executives and catch subtle signals between the lines that retail investors cannot access.

Learn to use reports as "intelligence compilations," extracting facts and data, but you must maintain extreme skepticism towards their "conclusions" and view them as a reflection of market sentiment and vested interests.

▋ Look at "Positioning"

Back to the core question: How important are earnings data and stock prices? Very important, but the market doesn't look at "past absolute numbers," but rather the difference between expectations and price. And among all factors, the first thing to look at is actually positioning.

Imagine a ship: if, before a piece of good news (such as better-than-expected earnings) is announced, the ship is already packed with passengers (Crowded Long), institutional holdings are high, and retail investors have flooded in due to FOMO (Fear Of Missing Out), then no matter how good the news, the ship cannot carry any more people.

At this point, as soon as the news breaks, the first thought isn't to chase the high, but rather to "Sell the News," and profit-taking selling pressure will instantly emerge.

Conversely, if a stock has good fundamentals but the "ship" is relatively empty before earnings (clean positioning, low institutional involvement, lack of retail interest), then even if the stock price has already risen somewhat, as soon as positive earnings news is released, there will be much more room to attract new capital onto the ship, and the probability of the stock price continuing to rise will naturally be higher.

On Wall Street, "good news that everyone knows" means that the positive catalysts have been fully priced in; no matter how good the data, it merely confirms consensus and cannot create alpha.

After each number is released, ask yourself, "How much of this news has the market already bought? How much room is left?" This is the true key to determining the strength of short-term stock price reactions.

▋ Data quality is relative

When earnings are announced, what Wall Street truly cares about isn't the absolute number of Earnings Per Share (EPS), but rather the "relative difference" in three aspects:

1. Magnitude and quality of beating/missing expectations: Is it driven by sustained core business growth, or one-time, non-operating income that beautifies the books?

2. Direction and strength of future outlook (Guidance): This is often more important than the current quarter's numbers. Even if a company has mediocre performance this quarter, if it provides strong future guidance, its stock price can still soar. Conversely, no matter how good current quarter's performance is, if the outlook for the future is pessimistic, the market will vote with its feet.

3. The difference from the market's "expected expectations": Here, expectations not only include analyst consensus but also the "whisper numbers" privately circulated in the market. Sometimes, earnings figures surpass official expectations, but if they don't meet the more optimistic whisper numbers, the market reaction can still be lukewarm.

▋ Escaping the Zero-Sum Game, Returning to the Essence of Investing

Overall, the thinking framework around earnings reports is generally as follows:

1. Is the positioning clean?

2. How high are market expectations? How much of the good news has been priced in?

3. Did actual data and future guidance "significantly" exceed expectations?

4. Does the current valuation still leave enough upside potential?

5. Did this event strengthen or weaken my long-term investment thesis for this company?

Therefore, attempting to gamble on a short-term direction on the eve of earnings announcements is essentially betting against Wall Street's top-tier capital and quantitative models on "expected expectations." This is an extremely fragile, low-win-rate zero-sum game.

Investment decisions that can truly navigate bull and bear markets deliberately move beyond this lottery-like short-term speculation. Our advantage lies not in guessing tomorrow's highs and lows, but in leveraging our deep understanding of underlying industry logic. This allows us to calmly buy into good companies at an excellent margin of safety when the market "mistakenly sells" them due to short-term noise and speculative trading.

This is the essence of investing.

Over the weekend, I deeply analyzed the earnings reports of five major giants. The weekend notes are completely free; you just need to subscribe to the newsletter to get the latest insights every week.

- KP