Strong earnings growth does not always translate into strong stock returns. In fact, companies can compound profits at 20-30% a year and still deliver negative returns if the valuation multiple contracts sharply. For investors, that makes understanding what is already priced into a stock just as important as forecasting future earnings.
Swati Khemani, Founder & CEO of Carnelian Asset Management & Advisors, believes de-rating is the “other side of alpha” and one of the most underappreciated risks in equity investing. She argues that the biggest warning sign emerges when market expectations begin to move faster than the underlying business, leaving little room for positive surprises.
