Narratives Can Be Misleading
Recent headlines suggested that companies like Zomato (Eternal) experienced a sharp 90% drop in profits for Q1 (see image below).
Logically, many assumed that this would result in a decline in stock prices. However, the opposite occurred—Zomato reached a new all-time high. So, what’s going on?
The truth is, market narratives don’t always align with price movements. Just because a company reports poor quarterly results doesn’t mean its stock will react negatively. Often, the market has already factored in those results or is anticipating something different altogether.
Price Leads, Narrative Lags
The story surrounding a stock is typically based on its past performance, while price movements are driven by what the market predicts will happen next. This is why price is considered a leading indicator, while narrative often lags behind.
Take Bajaj Finance, for example. Following its results, sentiment was very positive, yet the stock price fell. This likely happened because the market had already incorporated the good news into the stock price.
The ‘Sell on News’ Phenomenon
Another common scenario is when a stock rises ahead of a major announcement and then drops shortly afterwards. This phenomenon is known as ‘sell on news’. By the time the public consumes the headlines or watches related coverage, insiders or early investors may have already begun taking profits.
What appears to be a sudden decline is often just profit-taking by those who purchased shares much earlier.
What’s Already Priced In?
It’s essential to understand what the market has already discounted. Stock prices often reflect expectations for upcoming quarters rather than the most recently reported one. Reacting blindly to earnings reports or news without considering the price trend can lead to poor investment decisions.
The Market Has Its Own Logic
In the long run, strong performance is likely to be reflected in stock prices, but this doesn’t always happen immediately. The disconnect between news and price can persist for days, weeks, or even months, creating confusion among many investors.
What’s your view? Do you follow the story or the stock price? Share your thoughts in the comments! If you found this blog useful, don’t forget to SHARE it with your friends.
