Earnings Announcements: Why Are They Relevant?

Earnings announcements by companies are closely followed by$,$ and frequently result in$,$ share price revisions. This raises two issues. First, earnings announcements are $$ history$$ that is$,$ they reflect information on a past period. If the market values stocks based on expectations of the future, why are numbers summarizing past performance relevant? Second, these announcements revolve around accounting earnings. Going back to Chapter $2,$ we learned that such earnings may have little to do with cash flow. So$,$ again, why are earnings announcements relevant?