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Expand chart
Data: Bianco Research; Chart: Lazaro Gamio/Axios

Did you know I take requests? Lobbyist Bruce Mehlman writes in to ask: "If more than 70% of firms regularly beat Wall Street quarterly earnings expectations, doesn't that suggest the experts setting expectations are not so good at their jobs?"

It's a good question. In the second quarter of this year, the earnings-beat ratio actually reached 81%.

James Bianco, of Bianco Research, has two answers for Bruce.

Reg FD is the easy answer. Before 2000, companies would whisper earnings forecasts into the ears of favored analysts, who would then be rewarded for their accuracy. The SEC made such behavior illegal in 2000, saying that all earnings guidance has to be given to everybody in the market simultaneously. At that point, corporate incentives changed.

  • Companies receive a predictable spike in press attention when their earnings are released, and those stories nearly always mention the stock-market reaction. The easy way to engineer a short-term stock rise is to lowball your official earnings guidance. It doesn't help the stock price in the long term, but it does improve your PR.
  • That game might finally be coming to an end. In the third quarter of this year, the stocks of companies that beat earnings expectations actually fell by 1.5%.

If you want a non-engineered forecast, look at revenues, not earnings. Revenue beats are about as common as revenue misses, mainly because companies rarely game their revenue estimates.

The bottom line: The "experts" setting expectations are, ultimately, the companies themselves, rather than the sell-side analysts. Because earnings can be gamed, there's little point in analysts trying to second-guess them. Insofar as analysts add value, it's from long-term structural insights rather than short-term trading opportunities.

Go deeper:

Go deeper

Off the Rails

Episode 7: Trump turns on Pence

Photo illustration: Eniola Odetunde/Axios. Photos: Elijah Nouvelage, Alex Wong/Getty Images

Beginning on election night 2020 and continuing through his final days in office, Donald Trump unraveled and dragged America with him, to the point that his followers sacked the U.S. Capitol with two weeks left in his term. Axios takes you inside the collapse of a president with a special series.

Episode 7: Trump turns on Pence. Trump believes the vice president can solve all his problems by simply refusing to certify the Electoral College results. It's a simple test of loyalty: Trump or the U.S. Constitution.

"The end is coming, Donald."

The male voice in the TV ad boomed through the White House residence during "Fox & Friends" commercial breaks. Over and over and over. "The end is coming, Donald. ... On Jan. 6, Mike Pence will put the nail in your political coffin."

Big Tech's post-riot reckoning

Photo illustration: Sarah Grillo/Axios. Photo: Tasos Katopodis/Getty Images

The Capitol insurrection means the anti-tech talk in Washington is more likely to lead to action, since it's ever clearer that the attack was planned, at least in part, on social media.

Why it matters: The big platforms may have hoped they'd move to D.C.'s back burner, with the Hill focused on the Biden agenda and the pandemic out of control. But now, there'll be no escaping harsh scrutiny.

30 mins ago - Technology

Why domestic terrorists are so hard to police online

Illustration: Eniola Odetunde/Axios

Domestic terrorism has proven to be more difficult for Big Tech companies to police online than foreign terrorism.

The big picture: That's largely because the politics are harder. There's more unity around the need to go after foreign extremists than domestic ones — and less danger of overreaching and provoking a backlash.