Yahoo!'s earnings report and the potential benefit of low expectations

How the stock market responds to news can be a funny thing. Sometimes a company can post quarterly earnings which blow the doors off of consensus analyst estimates yet the stock price stumbles. At other times, a company can miss the estimates yet the stock price remains stable or even rises.

Such seemingly curious price reactions actually have a lot to do with the true expectations of investors. When investor expectations are high, even a great number can be a let down but when expectations are very low a poor to mediocre number might be better then the skeptical attitude reflects and the stock price moves higher.

If yesterday's after hours and this morning's pre-market trading are any evidence then market expectations were low for Yahoo! relative to estimates as it trades higher before the bell by a full 6% despite merely meeting estimates and providing only in line forward guidance.

Of course, pre-market price action can be curious at times as volume is thin and a few noisy traders can move the share price of even large companies. As well , yesterday's raucous rally brought out the animal spirits of even the grizzliest of bears so perhaps Yahoo!'s early rally on middling news merely reflects euphoria.

A full day of trading today could provide a key tell as to whether expectations were so low before the numbers that even yesterday afternoon's in line report was enough to calm fears and set the stage for a rally in the name.

A full day of trading today could provide a key tell as to whether expectations were so low before the numbers that even yesterday afternoon's in line report was enough to calm fears and set the stage for a rally in the name.