When quarterly earnings “miss Wall Street expectations,” whose expectations do we mean?

Target reported its quarterly earnings Wednesday. Relative to expectations, it was a miss. The retailer had to get rid of tons of inventory it had accumulated — in other words, it sold a whole lot of stuff at a discount. Profit fell to 1.2%, practically half of what the company had predicted for itself back in June. Earnings per share came in way below Wall Street forecasts. 

But on that note, when we say “Wall Street expects” something, who is Wall Street? And where do their expectations come from?

Wall Street expectations are made by people. People like Arun Sundaram. He’s a senior equity research analyst at CFRA Research.

He has a list of companies he keeps tabs on, including Kraft, Heinz, General Mills, Procter & Gamble, Costco, Kroger and Albertsons.

It’s a pretty long list, actually.

Anyway, he and legions of other analysts — there are about 5,000 in the U.S. — recommend that clients buy this stock, hold this stock, ditch this stock.  

“We build financial models,” Sundaram explained. “We also take into consideration what management says, what they expect will happen in the future. Are they optimistic, pessimistic about the future?”

Companies will often try and guide analysts on how they’re doing. You could call it transparency, you could call it managing expectations, you could call it marketing. 

“Sometimes management goes a little overboard one way or the other in terms of their optimism or conservatism,” said Erik Suppiger, a senior research analyst with JMP Securities. 

The views of thousands of analysts are published in reports, and that is where we get so-called Wall Street estimates. Each quarter, when companies reveal how things actually went, analysts get to see if their forecasts were right. 

“Any time there’s a surprise to that, you can see a short-term move in that stock price, especially when that surprise is to the downside,” said Dave Sekera, chief U.S. market strategist at Morningstar. 

So companies and analysts are kind of locked into this ongoing dance of prophecy and reality, and their dance moves are recorded in stock prices.   

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