Reading time: approx. 7 minutes
Many of my recent articles have dealt with valuation ratios, liquidity and the question of why markets often run ahead of the numbers. In this part, I deliberately go one step further - and delve deeper into a phenomenon that I observe myself time and again and that causes a lot of frustration in practice: companies deliver objectively strong quarterly figures, beat expectations, confirm their story - and the share price still falls. For me, this is not irrational market behavior, but the logical consequence of expectations, valuation and positioning.
The decisive starting point is simple: the market does not react to figures, but to deviations from expectations. Good figures are only a price driver if they are better than what has already been priced into the share price. Everything else is neutral - or is even interpreted negatively if expectations were previously too high.
One example that I find very appropriate here is $ADBE (-4,74%) (Adobe). Adobe has been delivering reliably high margins, strong cash flows and predictable growth for years. In several quarters, sales and profits have been reported above consensus, yet the share price has subsequently fallen sharply. When I look at these reactions, it was rarely due to the actual figures. The decisive factor was almost always the outlook or the implied pace of growth. With a high valuation, the market does not expect stability, but acceleration. If this fails to materialize, even good figures are read as a disappointment.
This is where the role of valuation becomes particularly clear. High multiples are nothing other than a condensed future. The more ambitious this future is in the share price, the less scope there is for positive surprises. I see this regularly: good figures merely confirm the familiar narrative - they do not expand it. And confirmation alone rarely justifies new buyers.
This pattern can also be observed with platform and growth stocks. $SHOP (-5,64%) (Shopify) is a good example. In phases in which the market is firmly planning for strong GMV growth and operational economies of scale, a solid quarter is simply not enough. Even rising sales and margins can lead to share price losses if growth "only" remains linear. For me, this is a classic case of the market not trading the present, but the change in future expectations.
Another factor that I consider key is positioning. If a share has performed strongly before the figures, many investors are already invested. Those who wanted to buy are in. After publication, there is a lack of new buyers, while the first market participants secure profits. In this constellation, a cautious subordinate clause in the earnings call is often enough to trigger selling pressure. The share price then falls not because the figures are bad, but because the balance of power tips.
I have observed this several times with $LULU (-0,8%) (Lululemon) on several occasions. Operationally, the company has been convincing for years with strong margins and high brand loyalty. Nevertheless, there were repeated sell-offs after good figures. Looking back, in my view the reason was almost never the operating business, but the interplay between valuation and sentiment. If the scenario in the share price was already very optimistic, every small uncertainty - for example in the consumer environment or in inventories - was weighted disproportionately.
In these phases, fear plays a paradoxical role. It is not the fear of bad figures, but the fear of the peak. After strong price rises, I - like many other investors - no longer ask myself whether the company is good, but how much positive scenario is left at all. Good figures then become an opportunity to take profits because they are perceived as the last point of confirmation before a possible normalization.
Another example from the industrial segment is $SMCI (+2,45%) (Super Micro Computer). In phases of extreme growth, even very strong quarters were not always rewarded with rising share prices. For me, this is because the market quickly begins to price in sustainability and cyclicality when growth rates are very high. The focus shifts away from the level of the figures to the question of how long this level can be sustained. The higher the expectation, the more asymmetrical the risk becomes.
Counterexample: When bad figures cause shares to rise
This is precisely the point where it is worth changing perspective - because the same logic also works in the other direction. I have repeatedly seen situations in which companies report weak figures, miss expectations or give cautious outlooks - and the share price still rises. The reason is the same, only mirrored: Expectations were already extremely negative.
A good example of this was $META (-0,91%) (Meta Platforms) in 2022, where the operational focus was on rising costs, margin pressure and a massive investment cycle. The figures were objectively weak, the outlook cautious - yet the share price rose sharply in several quarters after earnings. Why? Because the market had previously priced in an even worse scenario. The bar was so low that even "less bad than feared" was enough to trigger a revaluation.
A similar pattern was seen at times with $PYPL (-1,48%) (PayPal). Weaker growth, increasing competition, pressure on margins - all familiar. Nevertheless, the market reacted positively in individual quarters to figures that were objectively anything but strong. In my view, this was due to the fact that expectations were already extremely pessimistic. In such situations, the risk/reward ratio is suddenly asymmetrical: the downside risk is limited, but the potential for surprises on the upside is real.
These counterexamples help to complete the logic. Prices do not react to good or bad, but to better or worse than expected - relative to the valuation level and positioning. Good figures with high expectations can disappoint. Poor figures with extremely low expectations can provide relief.
For me, this means that quarterly figures can only be correctly classified in context. Without a sense of which scenario the market has already paid for, price reactions remain seemingly irrational. With this context, they become surprisingly consistent.
Outlook for part 5
In the next part of the series, I will go one step deeper into this logic. In Part 5 - Getting multiple expansion and contraction right, I will look at how valuations change over time, when rising multiples are justified - and when they are not. It's about distinguishing between structural change and exaggeration and how to recognize whether a market is building a future or simply piling up hope.
