[Beginner's Guide] Q1 Earnings Season Wrap-Up... What Is 'Consensus'?

[Asia Economy Reporter Kwon Jaehee] The earnings season for companies in the first quarter has come to an end. While good earnings might seem positive for stock prices, looking at stock price trends after earnings announcements, even if the earnings are good, if they fall short of this 'consensus,' the stock price often shows weakness. So, what does this 'consensus' mean?

'What exactly is the 'consensus'?

[Image source=Yonhap News]

The dictionary meaning of 'consensus' is 'agreement.' However, in the stock market, it is used with a slightly different meaning. It refers to the 'market expectation' or 'market forecast,' meaning the expected level that market participants are thinking of.

For example, if the consensus for Samsung Electronics' third-quarter operating profit is 10 trillion won, it means that market participants expect Samsung Electronics' third-quarter operating profit to be 10 trillion won.

How is the 'consensus' determined?

Then, how is the earnings consensus formed? The consensus is the average of analysts' earnings forecasts. For example, suppose analyst A expects Samsung Electronics' operating profit to be 5 trillion won, B expects 10 trillion won, C expects 8 trillion won, D expects 15 trillion won, and E expects 12 trillion won. The highest and lowest numbers are excluded, so 5 trillion won and 15 trillion won are removed. Then, the average is calculated from the remaining 8 trillion won, 10 trillion won, and 12 trillion won.

Why is the 'consensus' important?

As mentioned earlier, no matter how good the earnings are, if they do not meet this consensus, the stock price is bound to show weakness. It is important whether the operating profit increased or decreased compared to last year, but it is more important whether it met the market's expectations.

If the operating profit exceeds the consensus by more than 10%, it is called an 'earnings surprise.' During this first-quarter earnings season, the stock prices of companies that recorded this 'earnings surprise' responded immediately. Conversely, if the operating profit does not meet the consensus, it is called an 'earnings shock.' In this case, even if the earnings increased compared to the previous year, the stock price is bound to weaken.

Earnings are the 'report card' of a company. Especially, the part to pay attention to in earnings is the 'consensus,' as mentioned. This allows you to gauge the outlook for the company. Please keep an eye on this part every quarter during earnings announcements. It will help with long-term and successful investing.

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