Ex-Ante

Ex-ante refers to future events, such as the potential returns of a particular security, or the returns of a company. Transcribed from Latin, it means “before the event.”

Much of the analysis conducted in the markets is ex-ante, focusing on the impacts of long-term cash flows, earnings and revenue. While this type of ex-ante analysis focuses on company fundamentals, it often relates back to asset prices. For example, buy-side analysts often use fundamental factors to determine a price target for a stock, then compare the predicted result to actual performance.

"Ex-ante" essentially involves any type of prediction ahead of an event, or before market participants become aware of the pertinent facts. Earnings estimates, for example, involve ex-ante analysis. They take into account the predicted performance of all of a company’s business units, and in some cases individual products. This also involves modeling uses for cash, such as capital investments, dividends and stock buybacks. None of these outcomes can be known for certain, but making a prediction sets an expectation that serves as a basis of comparison versus reported actuals.

One type of ex-ante analysis that’s particularly useful to investors is gauging ex-ante earnings-per-share analysis in the aggregate. Consensus estimates, in particular, help to set a baseline for corporate earnings. It’s also possible to gauge which analysts among the group covering a particular stock tend to be the most predictive when their expectations are notably above or below those of their peers.

Sometimes, analysts also provide ex-ante predictions when a merger is widely expected, but before it takes place. Such analysis takes into account potential cost savings related to paring redundant activities, as well as possible revenue synergies brought about by cross-selling.

While all forecasting is ex-ante, some analysis still involves analysis immediately after an event takes place. For example, there’s often considerable uncertainty related to fundamental company performance following a merger. The merger itself is the initial event, but the ex-ante analysis, in this case, makes projections related to the next major upcoming event, such as the first time the combined firm reports earnings.

For all ex-ante analysis, it’s often impossible to account for all variables. Also, the market itself sometimes behaves seemingly erratically. For this reason, price targets that take into account many fundamental variables sometimes miss the mark due to exogenous market shocks that affect nearly all stocks. For this reason, no ex-ante analysis can be relied upon entirely.

Once the event that ex-ante analysis attempted to predict has passed, it’s then possible to compare expectations versus actuals, which is called ex-post. Looking back at predictions ex-post helps to refine them going forward, and sometimes provides additional insights.

Suppose company ABC is expected to report earnings on a certain date. An analyst at a research firm will use economic and financial data from its past and present operating conditions to make a prediction regarding its earnings per share. For example, she might analyze the overall economic climate and whether the company's business operation costs might be affected by it. She may also use past business decisions and earnings statements to hypothesize about the company's sales figures.