Final answer:
Predicting stock prices based on financial accounting measures like profitability is uncertain because stock prices are influenced by future expectations, market sentiment, and unpredictable news, reflecting a 'random walk with a trend'.
Step-by-step explanation:
If you are able to predict the change in financial accounting's measure of profitability, can you predict the change in stock prices? The answer tends to lean towards 'No'. While financial accounting measures such as profitability can provide insights into a company's financial health, predicting stock price movements is largely dependent on future expectations and news that affect these expectations. The stock market is influenced by a myriad of factors, and the role of expectations is particularly important. The stock prices are based on what investors expect will happen to a company in the future, not just its current profitability.
Thus, the task of forecasting stock prices involves not only evaluating a company's financial performance but also understanding market sentiment, analyst predictions, and potential news that could affect the company's future performance. Stock market analysts and individual investors tirelessly research companies to predict which ones might surpass current expectations and see a rise in their stock prices. Moreover, due to the random walk nature of stock prices—where short-term movements can be unpredictable and seemingly random—it is challenging to predict exact movements even with information about a company's profitability.