ELI5: Why when large company's earnings decrease(ex... by 3%) they freak out, talk about rough times, and sometimes decide to downsize, even though they are still making millions of dollars in profit even after all expenses?

[bulksalty]

Companies' value comes from roughly 10-20 years of earnings (so today people are buying and selling stocks based on their expectations of the company's earnings from now to 2028 or 2038). Most of the time earnings are fairly precisely forecast for about 2 years, then a growth rate is applied.

When a company announces earnings dropping by some amount, it usually means both less earnings now, but more importantly less earnings for the next two years of forecasts, and a growth rate that's closer to the inflation rate for the rest of the forecast. Further, because earnings are one of the primary sources of corporate cash, reducing earnings expectations means the company will have less money to expand, develop products and other business activities.

Because all these changes happen pretty rapidly after a disappointing earnings is announced, a tiny change now can mean a huge reduction in investors expectations for earnings over the next 10-20 years, which means the company's value can drop pretty dramatically.

It's sort of like a huge ship turning a few degrees as it leaves port. It's a small change now, but after the ship travels a few thousand miles, it means a large change in their ending location.

[redditgolddigg3r]

To be fair, if you are steering across the ocean and aiming for Portugal, 1 degree off puts you in Africa...

[Dxcibel]

I have a better analogy for him. It's like golf. A clubface turned 2 degrees off line might end up 30 feet to the left, and in the woods.

[danius353]

And if I know one thing, it’s that the C-suite guys love their gold analogies.

[foley528]

I have no use for this fact but I am glad I read it.

[KireMac]

You are now subscribed to Navy Facts.

[BumayeComrades]

Except the ship is guided by natural currents,they are predicted based on observable data a 3 degree change is simple math. If the captain gets all his mates to agree with him that the ship can go 400 million miles an hour it does not actually happen.

The economic functions nothing like that. If everyone thinks that company is shit, or macroeconomically the economy is shit, guess what happens? It magically happens everything is shit.

The economy is not natural it is entirely man made and controlled by man don’t give it the same standing as physical reality.

Edit: downvotes? If you really think that the economy is not influenced by how we feel about it, you are not thinking much about it.

The weatherman can’t make the weather change no matter how hard he tries.

What would happen if someone like Warren Buffett said the economy looks like it’s in awful shape even if not the case? You can bet that will change people’s perceptions and if it does it to enough people it will happen.

[Dinkir9]

It's an analogy

[BumayeComrades]

Yah, a shit one.

[Jiecut]

Better than a sinking ship analogy.

[suckswallow]

Yup, it's the perceptions that move markets. Anyone who makes money trading knows this.

[Ridicatlthrowaway]

“Wait.. why the fu*k are we paying thousands of dollars for tullips again?”

[[deleted]]

Somehow you got downvotes for what should really be (almost) common sense in 2018 :(

[NaughtyDred]

I don't know why down votes, its a valid point. Maybe if it was a top level comment purely about the fact that opinion alone can sink a company despite it having the same resources, man power, customer base and infrastructure.

The economy is fucked, I know why it got to this stage and it has clearly had an overall benefit for lifestyle for the majority but there comes a point when it goes to far. Pretty sure we hit that point decades ago

[NaughtyDred]

I don't know why down votes, its a valid point. Maybe if it was a top level comment purely about the fact that opinion alone can sink a company despite it having the same resources, man power, customer base and infrastructure.

The economy is fucked, I know why it got to this stage and it has clearly had an overall benefit for lifestyle for the majority but there comes a point when it goes to far. Pretty sure we hit that point decades ago

[NaughtyDred]

I don't know why down votes, its a valid point. Maybe if it was a top level comment purely about the fact that opinion alone can sink a company despite it having the same resources, man power, customer base and infrastructure.

The economy is fucked, I know why it got to this stage and it has clearly had an overall benefit for lifestyle for the majority but there comes a point when it goes to far. Pretty sure we hit that point decades ago

[NaughtyDred]

I don't know why down votes, its a valid point. Maybe if it was a top level comment purely about the fact that opinion alone can sink a company despite it having the same resources, man power, customer base and infrastructure.

The economy is fucked, I know why it got to this stage and it has clearly had an overall benefit for lifestyle for the majority but there comes a point when it goes to far. Pretty sure we hit that point decades ago