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Short explainers from the HOW IT WORKS section of WallStreetDigest editions: how markets, rates and companies work, in plain language, each with the glossary term it explains.
The glossary defines the terms behind them.
After-hours trading
After-hours trading is thin and can reverse
Thin trading can exaggerate moves. After-hours trading takes place once the regular session closes at 4 p.m. ET. Far fewer buyers and sellers take part. A handful of large orders can push a price further than it would move during the day. Lam Research shares tumbled 7.4% after hours, after the company narrowly beat quarterly earnings and revenue estimates. Such moves may shrink or reverse once the full market opens at 9:30 a.m. The pattern tends to come up when companies report results after the close.
Earnings season
Consensus is the bar, not a prediction
Consensus is the bar to clear. Analysts who follow a company publish forecasts, and their average is called the consensus. Investors treat it as a bar to clear, not a prediction. A result above it counts as a beat, one below it a miss. The size of the gap often shapes the reaction. Charles Schwab topped profit forecasts and reported record new client assets, yet its shares slid 2.7% because revenue landed just under the consensus. The same test tends to return each time a large company reports quarterly results.
Inflation
Core vs. headline inflation: which the Fed watches, which households feel
Headline inflation tracks the household basket. The Consumer Price Index, or CPI, tracks what households pay for a fixed basket of goods and services, from groceries and rent to gasoline. Its change over the past year is the headline inflation rate. Today's issue also covers a chip-stock selloff: Micron tumbled 3.6% after China's CXMT reported progress on a denser memory-cell design. Moves like that show up in share prices, not in the basket. The government publishes the report monthly, and markets often react on release day.
Earnings season
Guidance outweighs the quarter: why 'beat and fell' happens
Guidance outweighs the quarter. Guidance is a company's own forecast for its next results, often shared alongside quarterly earnings. Investors may weigh it more than the quarter just reported, because it describes what lies ahead. A strong quarter can still draw selling if the outlook disappoints. On Oct. 21, SpaceX reported third-quarter revenue and earnings above analyst estimates. Its shares rose 8.1% in trading after the market closed, so the reaction matched the beat. This tug between results and outlook tends to return each earnings season.
Analyst price targets
A price target is one analyst's 12-month opinion
A target is one opinion. A price target is one analyst's opinion of where a stock might trade about a year from now. Different firms can set very different targets. A change reflects that analyst's view, not anything new at the company. Target changes tend to cluster after earnings reports and big company announcements.
Interest rates
What the Fed controls (the overnight rate) and what it does not (the 10-year)
The Fed does not set mortgage rates. The Federal Reserve sets the Fed funds rate, the overnight rate banks charge each other. It does not set the 10-year Treasury yield, the return investors demand to lend to the government for a decade. Buyers and sellers of those bonds set it, and mortgage rates tend to follow it. On Oct. 23, money moved out of AI-linked stocks and into Treasuries, pulling that yield lower. Homebuilder D.R. Horton surged 6.2%. This split tends to matter again before each Fed meeting and whenever mortgage rates make news.
Interest rates
Basis point
Small units, large sums. Basis points are tiny slices of percentage points. Lenders, the Fed and bond traders use them to describe interest rate changes precisely. Even small steps add up on large loans, mortgages and savings balances. The Labor Department's September price report showed inflation running above economists' forecasts. That kept bets on another Fed rate hike alive, and any such hike would be quoted in basis points. The term tends to return at each Fed meeting and whenever borrowing costs move.
Sectors and the market
A sector can rise while the market falls
One group can buck the index. The S&P 500 tracks large U.S. companies and gives the biggest ones the most weight. A sector, meaning a group of companies in one industry, can rise while the index falls when that group is a small slice of the total. On Friday, crude oil prices rose and energy shares gained, yet the broad market fell. In all, 819 stocks declined. The split often shows up when oil prices move sharply on supply news.
Market declines
Correction, bear market, drawdown: the 10% and 20% lines
A correction measures size, not cause. Market convention calls a drop past a widely watched line below a recent peak a correction. The label describes how far prices have fallen, not why, and a correction does not always turn into a deeper slide. Chip stocks rebounded on Monday, ending the semiconductor index's longest losing streak since 2008. Even so, AMD has tumbled 17.1% from its 52-week high, well past that line. The word may come up again whenever a major index or a popular stock slips well below its latest peak.