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mean reversion to trend earnings

English translation: earnings returning to their (long-term) average

13:09 Jan 14, 2003
English language (monolingual) [PRO]
Bus/Financial / Fund report
English term or phrase: mean reversion to trend earnings
Earnings growth estimates are higher in the second half of 2003, a familiar and tiresome, if not risky, proposition. However, mean reversion to trend earnings could be a powerful catalyst for a rising market.
Johanna Holmberg (X)
Local time: 16:39
Selected answer:earnings returning to their (long-term) average
Explanation:
The "IFR Capital Markets Glossary" defines mean reversion as "the phenomenon whereby a variable tends to revert to its mean value".

Looking at corporate earnings at present, it's obvious that they are below their (long-term) averages for most industries. If you accept the (widely held) notion that they will revert to their average levels in the long run (looks like this might take a Marathon distance this time round, though...), then earnings should increase. For battered sectors (such as telecommunications), this reversion would be quite significant, and should therefore trigger a rather strong rebound in prices.
Selected response from:

Ralf Lemster
Germany
Local time: 16:39
Grading comment
Thanks very much!
4 KudoZ points were awarded for this answer



SUMMARY OF ALL EXPLANATIONS PROVIDED
4 +1earnings returning to their (long-term) average
Ralf Lemster
5Short-term average earnings rise towards the longer-term/historic levels
Peter Coles


  

Answers


2 hrs   confidence: Answerer confidence 4/5Answerer confidence 4/5 peer agreement (net): +1
earnings returning to their (long-term) average


Explanation:
The "IFR Capital Markets Glossary" defines mean reversion as "the phenomenon whereby a variable tends to revert to its mean value".

Looking at corporate earnings at present, it's obvious that they are below their (long-term) averages for most industries. If you accept the (widely held) notion that they will revert to their average levels in the long run (looks like this might take a Marathon distance this time round, though...), then earnings should increase. For battered sectors (such as telecommunications), this reversion would be quite significant, and should therefore trigger a rather strong rebound in prices.

Ralf Lemster
Germany
Local time: 16:39
Native speaker of: German
PRO pts in pair: 377
Grading comment
Thanks very much!

Peer comments on this answer (and responses from the answerer)
agree  Peter Coles: We're saying the same thing and you got there first. I'll leave mine up only to give Johannah different words. The points should go to you.
12 mins
  -> Thanks, I really appreciate that!
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2 hrs   confidence: Answerer confidence 5/5
Short-term average earnings rise towards the longer-term/historic levels


Explanation:
Short-term company earnings have been, on average, lower than normal recently, depressing the overall level of stock markets.

If average earnings were to rise back
towards the levels seen in longer-term trends, then this would encourage investors to start paying higher prices again, reviving the markets.

Peter Coles
Local time: 15:39
Native speaker of: Native in EnglishEnglish
PRO pts in pair: 47
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