Are Investors Reacting Too Quickly to Weak Financial Outlooks?

With many companies plummeting on the back of weak outlooks, we examine whether or not investors are being too reactionary.

Recent earnings seasons have thrown up some confusing results for many companies. Usually, beating estimates on earnings and revenue could send a stock soaring.

However, lately even outpacing the analysts isn’t enough to save a company from a dramatic sell-off. 

The culprit behind it all? A weak outlook.

Are we being too hasty?

No industry seems to be safe from this phenomenon, as investors make snap decisions based on forecasts. Upstart (NASDAQ: UPST), Cloudflare (NYSE: NET), Starbucks (NASDAQ: SBUX), and more all dropped following their respective earnings calls despite beating expectations for earnings and revenue.

It’s understandable, considering the widespread volatility and uncertainty surrounding the market these days, that investors might be feeling a little cagey. A post-pandemic landscape following the largest ever bull market was always going to lead us into uncharted territory. However, is the market being overly reactionary to these stunted outlooks?

Let’s not forget that supply chain issues are still rampant across the globe, inflation is rising fast, and lockdowns aren’t quite a memory of the past just yet. All of these issues have an undetermined end-point, so companies are naturally going to have to temper expectations.

I’m not saying we should ignore a company’s outlook, but considering the current economic climate, panic-selling at the slightest signal of muted expectations is probably not the best idea either. Remember, the ability to think long-term is the key to building generational wealth. Of course, it hurts to look at your portfolio and see a company like Upstart down over 56% in a day — trust me, I know.

But, if we look to the underlying thesis of a company, that’s where we can truly determine if we should sell or not. If the company is still doing things you believe in, short-term economic issues will soon be forgotten as the years go on and it begins to flourish again.