How does MMC's earnings volatility affect investors?

Marsh McLennan's (MMC) earnings volatility can significantly impact investors due to several interconnected factors:

1. **Investor Sentiment**: Volatility in earnings can lead to fluctuations in investor sentiment. Positive surprises, such as those seen in MMC's 7% underlying revenue growth and 10% adjusted EPS growth, can boost investor confidence, potentially increasing the stock price. Conversely, negative surprises, like foreign exchange headwinds, can lead to a decline in confidence and stock price.
2. **Risk Assessment**: Investors assess the risk associated with an investment based on the volatility of its earnings. Higher volatility can indicate greater uncertainty, leading investors to demand higher returns to compensate for this risk. This can result in a higher cost of capital for the company.
3. **Investment Decisions**: Volatile earnings can influence investment decisions. For example, if an investor is risk-averse, they might avoid MMC due to the perceived instability in earnings, even if the underlying business is strong. Conversely, risk-tolerant investors might see the volatility as an opportunity to buy low during downturns and sell high during upswings.
4. **Market Dynamics**: The market often reacts to earnings announcements with a post-earnings drift, where the stock price moves further in the direction of the earnings surprise. MMC's stock price has historically shown an average drift of 3.5% following earnings announcements. This drift can be positive or negative, depending on the direction and magnitude of the earnings surprise.
5. **Financial Planning**: Investors who use earnings estimates in their financial planning may need to adjust their models and forecasts when faced with volatile earnings. This can lead to more uncertainty in their own financial projections and investment strategies.

In conclusion, MMC's earnings volatility can affect investors through various mechanisms, influencing sentiment, risk perceptions, investment decisions, and market dynamics. It is essential for investors to consider these factors when evaluating MMC's stock and incorporating them into their investment strategies.