Are corporate earnings reports still valuable indicators?

Despite reporting a 15% year-over-year increase in revenue to $64.7 billion and a nearly 10% improvement in net income to $22 billion, Microsoft’s shares fell by over 1%. Why?

To summarize, a massive, well-established tech company at the heart of the AI revolution increased its revenue and net income, but the stock fell in response. Does that make sense to you? The mainstream media has attributed this drop to the marginal beats on analyst expectations and concerns over slowing growth in key areas like the Azure cloud service. We are now hearing that investors had anticipated stronger performance, particularly in the cloud segment, leading to a sell-off after those high expectations were not fully met.

This recent event prompts a question many traders have probably considered at least once–do earnings reports mean anything anymore?

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Sentiment outweighs performance

Market sentiment and even truthless rumors can outweigh actual financial performance when it comes to stock prices. An AI demonstration producing questionable images and inaccurate text can crash even the biggest brands. Sentiment doesn’t care how big or powerful the company might be.

And now, we see MSFT holders selling when business is still reported to be booming. Are Microsoft’s investors now foreseeing a sentiment shift on the horizon?

One rumor flying around tech forums is how AI is getting worse, not better. While new GPT tests consistently show higher performance scores, the quality of the produced content is less and less impressive as time goes by.

Basic errors for simple queries are also commonplace in most if not all LLMs now. Trusting AI to tell you the current week's number is a coin toss. Imagine trusting a medical diagnosis or a school bus to AI. LLMs are an amazing technological advancement, but in reality, LLMs have given computers our flawed human memory and a very counterintuitive approach to solving math problems. The basic technological foundation seems to be flawed… right? Maybe.

But imagine all that is true for moment, and you know with certainty that AI is a dead end. Would you keep your money locked in Microsoft? Of course not. You’d probably want to slowly pull out on a high, perhaps after a positive earning report.

Conclusion

Such a convincing narrative about Microsoft is exactly the kind of unfounded fiction that fuels unexpected market sentiment shifts. After all, such stories often make sense and fit with the available evidence. While it might be true, there’s no evidence to support the speculation… none, so this sentiment influence won’t have the same affects in the long term. Convincing as it is, it’s still fiction. 

Trading on sentiment is the opposite of analysis, and it should never be the primary influence behind your trades… but it also shouldn’t be ignored when doing your research.

If traditional indicators are suggesting a direction, and a rumor supports such price action, there’s very little left to dissuade you from committing to the trade. Just remember that the market you see is only an echo of the actions made by those holding all the money.  Taking full advantage of a breakout often requires imagination, vision, and a firm finger on the market pulse. Balancing instincts with strategy and consistency is a skill even the most seasoned traders continue to refine.

As for sentiment, there are no limits. Microsoft probably dropped after the ‘blue screen of death’ incident. And like Tesla’s broken window and Google Bard’s observatory hickup, the market quickly regains sense and composure and corrections reliably occur. Be cautious, but be skeptical of your caution when investigating sentiment.