When reality fails to meet expectations, disappointment is inevitable. In every corporate’s results season, reality always lags or exceeds expectations. Supposedly, investors are conditioned to expect that. Then why do investors overreact when a company fails to meet expectations?
The reason is more related to the company, its track record, reputation, and guidance. When a company has a reasonable track record on all these aspects for extended periods, it is natural that any underperformance makes investors reactive. There is also a high level of expectations to contend with. This is especially true of marquee companies that announce results early on in the season. Investors are conditioned to believe that early results will be good results. The unspoken writ is that bad results will always come later. Nobody is in a hurry to come out early with bad news.
So, when Infosys was amongst the early Indian corporates to announce its Q4 and FY22-23 numbers, the markets were unprepared for disappointment. The markets believed that results would be in line with guidance. This explains the market’s overreaction. With the Indian markets closed, the ADR has taken a significant beating.
A key observation is that Infosys has very high floating stock. And, due to that factor, a higher weightage in the Nifty. If more companies with higher free float disappoint, that would be a significant risk to index-level returns in the Indian market. The markets should watch out for the impact on index-level returns if this trend spreads to more such companies. The coming weeks will be crucial to set the direction for large-cap investing in the Indian markets. Early trends indicate that a reset in strategies is inevitable.