The Predictive Power of Forward-Looking Earnings Revisions

Good Morning Ladies and Gentlemen

”All ideologies are inaccurate to varying degrees. More subtly, all are incomplete in various ways; in particular, they fail to anticipate some crucial events.”

Social Philosophy and Policy, Volume 41, Special Issue 1: Ideology

Thank you very much for the generous feedback on my last “Stefan’s Weekly.” I was particularly pleased by the many, many positive messages about my daughter’s song that was included. Thank you very much!

Thanksgiving

The shortened Thanksgiving week lived up to its reputation as a statistically positive week. There was significant upward momentum, with the trend pointing higher. We continue to expect follow-up buying for the time being. However, it would not be unusual for a corrective movement to take place in the week after Thanksgiving.

Today’s Stefan’s Weekly

Today, I would like to address a topic that is frequently overlooked in analysing the factors influencing fluctuations in equity prices over time. To begin, however, let us first examine the landscape of Japanese interest rates.

Japanese Interest Rates

In the weeks before Thanksgiving, a wave of selling has swept across global markets, with the leading stock exchange in New York experiencing significant declines. Interest-rate-sensitive stocks, particularly those of major tech companies, have been especially affected. Contrary to popular belief, the recent price declines cannot be attributed solely to concerns over the AI boom. Instead, the sharp increase in interest rates in Japan has been a source of anxiety. Many large investors previously borrowed money at low rates in Japan, which on April 7, 2025, stood at 1.07% to invest profitably in other regions. However, this favourable scenario may be nearing its end, as the yield on ten-year Japanese government bonds has risen to over 1.8%, the highest level since just before the 2007/08 financial crisis. Furthermore, 20-year government bonds are now yielding 2.82, up from 1.89% in April of this year. It will be interesting to see if this rise in Japanese interest rates quietly undermines the ongoing stock market boom.

The Predictive Power of Forward-Looking Earnings Revisions

Systematic analysis of earnings forecast adjustments plays a catalyst for stock price movements. Trading systems that utilise computer-driven AI models systematically analyse both positive and negative earnings revisions, meaning changes in analysts’ or management’s forecasts of a company’s future profits. These models generally employ natural language processing (NLP) to examine earnings reports and guidance, alongside quantitative methods to assess the magnitude and frequency of revisions.

Positive Surprise

Empirical evidence indicates that upward adjustments to forward-looking earnings estimates (such as next quarter’s or next year’s EPS) are statistically linked to abnormal positive returns, particularly when these revisions are unexpected and accompanied by a modest consensus among analysts. This phenomenon occurs because positive earnings surprises often signal improved fundamentals, attracting institutional investors and, very importantly, stimulating algorithmic buying. The resultant order flow generates price momentum, reinforcing the initial price movement and elevating valuations.

Negative Surprise

Conversely, companies that consistently lower their earnings forecasts over multiple quarters tend to experience a negative price drift. AI-driven trading systems may identify such stocks for short-selling or portfolio underweighting, as ongoing negative revisions often precede deteriorating fundamentals or sector underperformance.

Conclusion

In summary, the direction, magnitude, and persistence of earnings revisions serve as crucial inputs for AI-based trading systems, which leverage these factors to forecast price trends and optimise portfolio allocations, thereby driving trading volumes on the upside or downside, creating a sort of self-fulfilling prophecy.

Ladies and Gentlemen

Feel free to send your messages to smk@incrementum.li. Many thanks, indeed!

I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 153
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li