Final answer:
Stock prices are largely driven by expectations about future performance rather than just present earnings. Analysts look to identify companies that may outperform current expectations to predict stock value gains. Accurate financial forecasting involves adjusting financial statements to anticipate ongoing activities.
Step-by-step explanation:
The concept that stock prices are influenced by expectations rather than just current earnings is central to financial forecasting.
When forecasting, analysts must exclude one-time events and adjust financial statements to reflect a consistent operational baseline—not just for companies such as Ford Motors and General Motors but for all publicly traded companies. This sets the stage for accurate prediction of financial performance. The unexpected truth behind stock valuation is that a company believed by analysts to have poor prospects, which then outperforms those expectations, can lead to significant uplift in its stock value.
This is because expectations shift and reshape investment perspectives, causing stock prices to adjust accordingly. The ongoing search for these potential 'shining star' companies is what drives many investors and analysts in their round-the-clock analyses within financial markets.