When companies report earnings, investors often focus more on forward guidance than the actual results. Guidance tells you where the company expects to go, while earnings tell you where it has been. Since the stock market is inherently forward-looking, understanding guidance is crucial for anticipating stock movements.
What is Company Guidance?
Guidance refers to the financial outlook that company management provides for future periods. This typically includes projections for revenue, earnings per share, margins, and sometimes specific operational metrics. Companies issue guidance to help analysts and investors form expectations.
Not all companies provide guidance. Some management teams believe guidance creates short-term pressure and prefer to focus on long-term performance. Others provide detailed quarterly guidance. The approach varies by company and industry.
Legal Protection: Companies always include disclaimers that guidance consists of forward-looking statements subject to risks and uncertainties. This protects them legally if actual results differ from guidance. However, guidance still creates market expectations that affect stock prices.
Types of Guidance
Quarterly Guidance
Projections for the upcoming quarter. This is the most specific and most watched form of guidance since the time horizon is short and estimates should be relatively accurate.
Annual Guidance
Full-year projections, typically provided at the start of the fiscal year and updated quarterly. Annual guidance helps investors understand the overall trajectory of the business.
Long-term Guidance
Multi-year targets that some companies provide at investor days. These are more speculative but signal management's strategic ambitions.
Example: Guidance Structure
Apple provides the following in a typical earnings report:
- Q3 Revenue: $81-83 billion (quarterly guidance)
- Gross margin: 44-45% (quarterly guidance)
- No specific EPS guidance provided
- Qualitative commentary on product demand and supply chain
Analysts use this information to build their own EPS estimates.
How Guidance Affects Stock Prices
Guidance often drives bigger stock moves than the actual earnings results. Here is why:
The Market is Forward-Looking
Current earnings are already in the past by the time they are reported. What matters for stock valuation is future earnings, and guidance provides the best available information about those future earnings.
Guidance Shapes Estimates
Analysts revise their models based on new guidance. If guidance comes in above expectations, analysts raise their estimates, which raises price targets. If guidance disappoints, estimates and price targets come down.
Example: Guidance Impact
Company XYZ beats Q2 earnings by 8%, sending the stock up 3% after hours.
During the earnings call, management guides Q3 revenue below consensus expectations.
By market open, the stock is down 5% as the guidance miss overshadows the earnings beat.
Over the next week, analysts lower their estimates and price targets.
Interpreting Guidance Language
Companies often use subtle language that experienced investors learn to interpret:
- "Conservative guidance": Management is underpromising with hopes of overdelivering
- "Consistent with prior guidance": No change, which can be good or bad depending on expectations
- "Raising guidance": Business is stronger than expected - typically bullish
- "Lowering guidance": Business is weaker than expected - typically bearish
- "Withdrawing guidance": Uncertainty is too high to forecast - often very bearish
- "Above seasonal trends": Outperforming normal patterns
Guidance Games: Some companies consistently provide conservative guidance that they beat every quarter. Others provide aggressive guidance to pump the stock. Track a company's guidance history to understand their patterns.
Guidance Beats and Misses
Just like earnings, guidance can beat or miss consensus expectations:
Guidance Beat
When the midpoint of guidance exceeds the consensus estimate for that period. Guidance beats typically trigger positive analyst revisions and stock price increases.
Guidance Miss
When guidance falls below consensus expectations. This often triggers more selling than an earnings miss because it affects future expectations.
In-Line Guidance
When guidance matches expectations. The stock reaction depends on what investors hoped for - if they wanted raised guidance, in-line can be disappointing.
Warning: Guidance Ranges
Companies often provide guidance as a range rather than a single number. A wide range signals uncertainty and can itself be negative. Also note whether the consensus falls above or below the midpoint of the range - this affects interpretation of whether guidance is a beat or miss.
Qualitative Guidance
Beyond the numbers, management provides qualitative commentary that matters:
Earnings Call Commentary
Listen for tone and confidence. Executives who sound uncertain or defensive may be signaling problems not captured in the numbers. Those who sound confident and optimistic may be telegraphing upside.
Strategic Commentary
Comments about market position, competitive dynamics, customer demand, and strategic initiatives help investors understand the business trajectory beyond the guidance numbers.
Example: Qualitative Impact
A semiconductor company provides in-line guidance but adds commentary that:
- Order backlogs are at record levels
- New product launches are tracking ahead of plan
- Customer inventory levels are healthy
The stock rises 4% despite no guidance beat because qualitative factors suggest upside.
Companies That Do Not Guide
Some notable companies have stopped providing guidance or never provided it:
- Berkshire Hathaway - Warren Buffett does not believe in short-term guidance
- Some tech companies stopped guiding during COVID uncertainty
- Certain companies believe guidance encourages short-termism
For non-guiding companies, analysts rely on industry trends, historical patterns, and management commentary to build estimates. This increases uncertainty around earnings.
Trading Around Guidance
Understanding guidance enables several trading strategies:
- Pre-earnings positioning: Anticipate whether guidance will be raised or lowered based on business trends
- Post-guidance trading: Trade in the direction of guidance changes, recognizing that revisions take time to fully reflect in prices
- Identify sandbagging: Some companies consistently beat conservative guidance - expect upside
- Watch for guidance traps: Aggressive guidance that the company may struggle to meet
Track Guidance and Results
Pro Trader Dashboard helps you monitor earnings and guidance for stocks in your portfolio. See how guidance changes affect your positions over time.
Summary
Company guidance is often more important than actual earnings results because it shapes future expectations. Understanding the types of guidance, how to interpret management language, and the difference between guidance beats and misses helps you anticipate stock movements. Pay attention to both quantitative guidance numbers and qualitative commentary on the earnings call. Remember that guidance is a forward-looking estimate, not a promise - actual results may differ significantly.
Learn more: Earnings Report Basics and Earnings Beat or Miss.