Why You Should Pay Attention to Company Guidance

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Earnings season, those quarterly corporate financial reporting periods, can bring a lot of surprises — sometimes unexpected ones.

In late October, for instance, General Motors reported a 50% drop in profits compared with the same quarter the year before. After the announcement, GM stock rose nearly 15%. That same day, Netflix reported a nearly 8% climb in profits. Its shares plummeted 10% on the news.

What gives? In both cases, what mattered most wasn’t whether profits were rising or falling, but how the company’s results compared with Wall Street’s expectations, which are largely dictated by guidance from the company. Netflix’s recent quarterly earnings, for instance, fell short of analysts’ expectations; GM’s came in ahead.

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Company earnings-and-revenue guidance is essentially a forecast from corporate executives about how the firm will likely perform for the coming year or quarter ahead. Although the guidance isn’t required, many large firms provide it.

These corporate projections matter because they help shape the estimates and recommendations of Wall Street analysts — and that can sway whether investors buy or sell a given stock.

What’s more, over the short term, whether a company’s actual financial results come in above or below analysts’ estimates can move the share price, too, sometimes dramatically. All told, an understanding of the nuances of the corporate guidance game can be a useful tool for investors.

An evolving practice

The relationship between company guidance and Wall Street estimates is tight.

The Securities and Exchange Commission (SEC) first required public companies to report their financial results four times a year in 1970. With quarterly earnings reports came quarterly estimates from Wall Street analysts. Soon after, a small New York brokerage firm started to average the estimates into a so-called consensus.

Over time, thanks in part to changes in securities laws that gave public companies greater protection from shareholder lawsuits, more firms began to offer forecasts to better guide the growing number of analysts, who relied on them to calculate their own earnings estimates.

Since then, however, many Wall Street observers have decried the short-term focus that is spurred by quarterly guidance and earnings expectations. Concerns about short-termism even prompted a recent proposal from the White House, now being explored by the SEC, to allow public companies to report their results semiannually instead of quarterly.

"When the quarterly process is a milestone on the way to a longer-term goal, there’s nothing wrong with it," says Sarah Williamson, chief executive of FCLTGlobal, a think tank that advocates long-term investment thinking. "The problem is when that quarterly behavior leads to people taking shortcuts rather than building towards a long-term strategic approach."

Fewer publicly traded firms offer guidance on future results these days than in years past. Only about 20% of S&P 500 member companies offer regular performance projections today, down from the 50% that provided guidance to Wall Street analysts in 2004, according to FCLTGlobal. Many new public companies never adopt the practice.

"Quarterly guidance is like smoking. It’s a lot easier not to start than to quit," says FCLTGlobal’s Williamson.

That said, the firms that provide guidance are loath to lower previous projections or pause them. Either move typically means that a company’s business is struggling.

In a 2008 study, University of Florida Warrington College of Business professor Jennifer Wu Tucker, working with two coauthors, found that most companies that stopped providing quarterly guidance in the early 2000s did so because they were performing poorly and had a greater risk of missing their earnings expectations.

Consider this more recent example: After tariff uncertainties started to rise, toy maker Mattel paused providing full-year guidance for 2025 earnings and revenues last May, only to cut its previous forecast two months later. Shares fell 16% the next trading day.

The surprise factor

Share prices can move significantly depending on whether a company beats analysts’ consensus estimates in any given quarter (a positive surprise) or falls short of estimates (a negative surprise). But both offer valuable cues to investors.

The more consistently a company beats earnings estimates, for example, the better the stock price tends to perform. Ramkumar Rasaratnam, chief investment officer for equities at AXA Investment Managers, found that stock in companies that delivered very low earnings growth but consistently beat expectations tended to outperform shares in firms that boasted higher earnings growth but regularly reported results below expectations.

"Earnings surprise is consistently rewarded by the market, but earnings growth is not," says Rasaratnam.

Conversely, when firms report profits that fall below analysts’ expectations, that’s a good sign the business is struggling.

Last July, for instance, UnitedHealth Group, dogged by higher-than-expected medical costs and an unexpected drop in revenue in its Optum Health business, missed consensus estimates for the second quarter in a row by 17%, a substantial shortfall.

But bad tidings had been brewing: The July-quarter miss came two months after the firm had pulled its full-year earnings guidance for 2025 and just days after the health care giant acknowledged that it was complying with a Department of Justice investigation into its Medicare billing practices. Needless to say, the stock suffered.

"Investors are brutal" when companies miss earnings estimates, says Irene Tunkel, chief U.S. equity strategist for BCA Research. Though UnitedHealth stock has rebounded some since, the shares dropped 60% between April and August of 2025.

Many companies purposely lowball the guidance they provide Wall Street, Tunkel says, adding that she suspects they do so to widen the gap between their guidance and what they actually deliver. It helps explain why most companies beat analysts’ estimates. In the second quarter of 2025, for instance, 81% of S&P 500 members beat their consensus estimates for profits and 80% beat their expectations for revenues, according to data provider FactSet.

Putting the cues to work

The managers of FullerThaler Behavioral Small-Cap Growth Fund (symbol FTXNX) use positive earnings surprises as a starting criterion when they pick stocks. But they’re choosy. "We’re only looking at a small percentage of earnings surprises," says Ed Stubbins, a partner at Fuller & Thaler Asset Management.

Specifically, they favor the sort of earnings surprises that are propelled by a growth catalyst, one that may persist in the future. Most earnings surprises are driven by external factors, such as changes in commodity prices, tax rates or accounting rules. But when company managers say a new product is selling much better than they expected and is fueling earnings growth, Stubbins says the fund’s managers are inclined to step in and buy the stock, in part because they think investors will be slow to react.

Over the past five years, the approach has worked well. FullerThaler Behavioral Small-Cap Growth’s five-year annualized return, 15.7%, beat 96% of its com-petition (funds that focus on small, growing companies).

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

David Milstead joined Kiplinger Personal Finance as senior associate editor in May 2025 after 15 years writing for Canada's Globe and Mail. He's been a business journalist since 1994 and previously worked at the Rocky Mountain News in Denver, the Wall Street Journal, and at publications in Ohio and his native South Carolina. He's a graduate of Oberlin College.