The market price of common stock is based on investors’ expectations about future earnings. This statement is

The statement regarding the market price of common stock being based on investors' expectations about future earnings is fundamentally true within the context of finance and investment theory.

Explanation

1. Fundamental Analysis: Investors typically assess a company's future earnings potential when valuing its stock. This involves analyzing financial statements, market trends, and economic indicators to estimate future profits.

2. Discounted Cash Flow (DCF): One common method used to determine the present value of expected future earnings is the DCF model. In this model, future cash flows are projected and then discounted back to their present value using an appropriate discount rate.

3. Market Sentiment: Investor perception and sentiment also play a significant role in stock pricing. If investors expect a company's earnings to grow, they may buy the stock, driving its price up. Conversely, if the outlook is negative, the stock price may drop, reflecting lower expected future earnings.

4. Efficient Market Hypothesis: This theory posits that all available information, including expectations about future earnings, is already reflected in stock prices. Hence, any new information about future earnings tends to be quickly absorbed by the market, causing stock prices to adjust.

Conclusion

In conclusion, the market price of common stock indeed hinges on investor expectations regarding future earnings. These expectations are shaped by both quantitative analysis of financial performance and qualitative assessments of market conditions and company potential.