Unlocking Stock Market Success: Leveraging Earnings and Market Trends to Shape Winning Strategies

Good evening, dear students and friends!

I’m delighted to welcome you to Diamond Ridge Financial Academy, where we explore cutting-edge investment strategies together.

I hope you all have a relaxing and enjoyable evening ahead!

Last night, we delved into identifying high-growth quality stocks and discussed promising investment directions in the current market environment. We discovered that, beyond selecting the right industries and sectors, it’s also essential to capture market hotspots and short-term catalysts, such as premiums from institutional trading and investment signals driven by institutional fund inflows.

We also analyzed BTC as a representative of crypto. As a trendsetter in the digital economy’s future, BTC has attracted substantial institutional investment, paving the way for significant growth potential. Therefore, in our trading practices, aligning with favorable news and tracking institutional fund inflows can help us seize more precise buying opportunities.

This week, we’ve shared strategies ranging from the global investment environment to industry trends to guide stock selection. Some of you have expressed different perspectives on choosing high-growth stocks. For instance, some believe that simply buying stocks with good earnings is enough to profit, while others argue that purchasing stocks at low prices guarantees large returns. So, which investment views are correct? What standards or investment principles should we follow?

Tonight, we will analyze the intrinsic value of investments from two perspectives, which are performance and price. Before diving into this discussion, let’s first review today’s investment market and get a glimpse of the latest market dynamics.

Today’s stock market performance aligned perfectly with our predictions, demonstrating our precise understanding of market trends.

To begin with, as anticipated, the UK stock market experienced a choppy session today. The FTSE 100 index fluctuated around the 8,270-point level and ultimately edged up by 0.07%. This matches our earlier assessment of the market’s overall cautious sentiment.

Additionally, in terms of sectors, technology stocks surged as expected, especially within the artificial intelligence (AI) industry, which we have been closely monitoring. As we previously analyzed, the AI sector is undergoing rapid growth and holds tremendous potential for expansion. The rise in the Philadelphia Semiconductor Index today further validates this trend.

It’s exciting to see that the tech stocks we recommended also experienced significant gains today. For instance, Rolls-Royce, which we recommended this past Tuesday, was bought by many participants around £5.35. The stock has now successfully broken above the 21-day moving average (as shown in the chart), delivering a profit of over 4%. This highlights the precision of our market trend analysis and the depth of our stock research.

Just like last week’s recommendation of SMCI, we advised selling it on Monday this week at the right moment. Such precise operations require constant monitoring of market dynamics and the ability to provide timely investment advice to help you achieve greater success in the market. For follow-up guidance on real-time operations, please make sure to contact your assistant.

Of course, every profit might seem straightforward on the surface, but behind the scenes numerous factors influence stock prices. These include technical breakouts, earnings expectations, political developments and market sentiment. Stock prices fluctuate in real time to find their equilibrium among these various factors. Ultimately, whether prices rise or fall depends on the balance of funds between bullish and bearish positions.

For example, BTC recent rally was driven by a surge in bullish funds overwhelming bearish positions, pushing its price higher. In addition to crypto aligning with the broader trend of digital economic development, its short-term boost came from strong support by figures like “Trump,” a significant bull advocate, making it the hottest investment market currently.

So, how exactly do stock prices reflect a company’s future earning potential? This brings us to an important concept: discounted future earnings. Investing in stocks generates two types of returns which is dividends and price appreciation. In practice, the returns from price appreciation far outweigh those from dividends. The core logic behind price appreciation lies in how discounted future earnings are reflected in current stock price movements. To truly understand the relationship between stock prices and revenues, we need to dive into this critical financial concept: discounted future earnings.

The core of investing is buying future value at today’s price. A company’s future earnings are discounted back to their present value which determines its current stock price. This process can be quantified using a method called the Discounted Cash Flow (DCF) model:

1. Forecast future earnings: Let’s say a tech company is expected to grow its earnings by 20% annually over the next five years. If its first-year earnings are £100M, they might grow to £249M by year five.  

2. Discount future earnings: Future earnings aren’t worth the same as today’s money. Factors like inflation, risk and the cost of capital are considered to discount those earnings. For example, with a discount rate of 10%, the £249M in year five would have a present value of around £155M.  

3. Calculate total present value: Add up the discounted earnings for all future years to get the company’s total value. This is how the market arrives at a stock’s overall worth based on its earnings potential.

This discounting process shows why stock prices depend not just on current profits but heavily on future growth potential. For example, NVIDIA, a leader in AI, has seen its stock price multiply in recent years because of strong market expectations for its future earnings, even though its P/E ratio remained high during this period.  

The P/E ratio (price-to-earnings ratio) which compares a stock’s price to its earnings per share (EPS), is a key indicator of whether a stock is overvalued or undervalued. However, changes in the P/E ratio are not just about earnings, they are strongly influenced by market expectations.

For instance, if a company’s earnings grew 10% over the past year but the market had expected 20% growth, investors might feel the company’s growth potential was overestimated. This disappointment could cause the stock price to drop, even though earnings increased.  

A good example is easyJet (EZJ), a UK airline. Even when its earnings reports show growth, concerns about the airline industry’s future, like rising fuel costs or post-pandemic demand uncertainty can lead to pessimistic market expectations and falling stock prices.  

So, this shows that while company performance matters, it’s not the only factor driving investment decisions. Future growth expectations are what really matter.

From a value investing perspective, stock price growth is an external reflection of a company’s earnings growth, but the process is more complex than it seems. If a company consistently generates profits and shows increasing profitability, investors gain confidence in its future and are willing to pay more for its stock, pushing the price higher.  

Take Rolls-Royce (RR.) as an example. Its stable earnings performance over the years has supported its relatively strong stock price. As a leading UK manufacturing company, Rolls-Royce’s steady profit growth has contributed to a long-term upward trend in its stock price.

However, relying solely on earnings growth to predict stock price movement isn’t foolproof. Market expectations play a huge role. Even if a company performs well, its stock price may not rise, and could even fall if the market expects its future earnings growth to slow down. On the flip side, declining earnings can lead to falling stock prices. For instance, UK pharmaceutical giant GlaxoSmithKline (GSK) has seen its stock price drop in recent years as its core business profitability declined. This shows the close link between profitability and stock price, as well as the impact of market expectations.

This highlights a common misconception among investors, the belief that buying stocks of companies with good performance guarantees high returns. While well-performing companies often have strong profitability and growth potential, relying solely on performance to judge investment value isn’t enough.  

First, earnings are just one factor in investment decisions, they’re not the only standard. A company with solid earnings might still face risks like intensified competition, policy changes or technological innovation. Second, market expectations of earnings growth heavily influence stock prices. Even if a company performs well, its stock price may not rise, or could fall if the market expects slower growth ahead.  

To succeed in the stock market, you need to consider a wide range of factors and make well-informed investment decisions.

In contrast, some tech companies may see their stock prices soar despite not yet achieving significant profitability, driven by high market expectations. For example, Google (Alphabet) the parent company of AI company DeepMind is seen by investors as a future leader in the AI field. While its short-term profits have not been noticeably impacted by AI, the market is optimistic about its long-term earnings potential which has driven its valuation higher.

Tech stocks, particularly companies in artificial intelligence (AI) and digital assets have drawn significant market attention. This is not merely due to their current profitability but also because of their potential for future earnings growth. Technologies like AI and blockchain have the potential to revolutionize industries and deliver massive economic benefits.

Investing in tech stocks is not only about their present financial performance but also about their potential to redefine the global economy over the coming years and decades. The relationship between stock prices and company earnings is both simple and complex. It is simple because earnings growth is a key driver of stock prices, yet complex due to the many variables involved such as market expectations, discounted future earnings and industry trends.

For investors, understanding this relationship requires long-term vision—not just focusing on current earnings but staying alert to growth potential and market expectations. In fields like AI and digital assets, opportunities and risks coexist but for patient and forward-looking investors, these areas could become key engines of future wealth growth.

Fortunately, in today’s rapidly evolving technological landscape there’s no need to stress over complex investment analyses. Instead, we can leverage powerful tools to invest with ease and enjoy more time for life. Diamond Ridge Asset Management's quantitative trading system is one such tool. It simplifies all the complexities of investing and delivers smarter, more efficient investment experiences, particularly with the upcoming launch of its Quantitative Trading System 5.0 in January.

Quantitative Trading System 5.0 harnesses AI technology for more accurate predictions, faster responses, lower risks and easier operations. It can analyze and learn from massive amounts of data, offering precise market trend forecasts to help investors make smarter decisions. AI enables rapid identification of market changes and adjustment of trading strategies, allowing investors to seize fleeting market opportunities. The launch of Quantitative Trading System 5.0 will provide investors with a revolutionary investment experience making it easier than ever to achieve financial goals. Join Diamond Ridge Financial Academy and embrace the future of quantitative investing!

That concludes tonight’s discussion. I hope this content helps you better understand the relationship between stock prices and corporate earnings while finding the investment strategies that suit you. In the next session, I’ll explore stock valuation from the perspective of price assessment helping you identify “undervalued stocks.” If you have any questions about stocks, crypto, forex or other investments, feel free to contact me anytime! Wishing everyone a wonderful weekend!