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earnings season

What is Earnings Season and What to Expect?

The earnings season offers attractive opportunities for equities traders to learn more about the firms they have invested in and to put prospective share price movements into perspective. Continue reading to learn more about the earnings season, important dates for earnings announcements, and what to look for in an earnings report.
WHAT IS EARNINGS SEASON, AND HOW IMPORTANT IS IT?

During the “earnings season,” many of the biggest publicly traded corporations release their most recent financial reports every fiscal quarter. This season typically lasts a few weeks. Revenue, net income, earnings per share (EPS), and forward forecast are just a few of the data items included in an earnings report that may assist investors in gaining an understanding of the company’s present state and prospects. You may get this information online at sec.gov, in several financial magazines, and on the websites of specific businesses.

The earnings season is crucial because it enables market players to get data from the firms they are watching and the more extensive index. When considering bellwether stocks, for instance, an optimistic Apple (AAPL) earnings report may cause investors to be optimistic about Nasdaq 100 futures.

An earnings call is another event that could go along with an earnings announcement. The firm has a conference with analysts, the press, and investors to discuss the results of an earnings report and, in many instances, to allow audience members to ask management questions. While not all firms host earnings calls, traders may get additional information by carefully examining the reports to help them make judgments.

WHEN IS EARNINGS SEASON, AND WHEN DO REPORTS APPEAR?

Typically, the earnings season begins a few weeks following the conclusion of each quarter (December, March, June, and September). In other words, the start of the earnings season coincides with the release of the central US banks’ quarterly results, which typically occurs in January or February for Q4 results, April or May for Q1 results, July or August for Q2 findings, and October or November for Q3 results.

When Walmart (WMT) issues its earnings report, the unofficial conclusion of the earnings season typically coincides with an increase in earnings reports.

3 FACTORS TO CHECK IN COMPANY EARNINGS REPORTS

The earnings reports of companies should include several things. Traders should pay close attention to the performance of the most significant “bellwether” stocks, comprehend the importance of an earnings recession in a particular firm, and be aware of how, based on the weighting of the specific security, an earnings release may affect a relevant index.

1) Stock bellwether performance

When examining corporate results, it’s critical to keep an eye out for “bellwether” stocks, which serve as a barometer for the health of the whole economy. Even though a stock’s position as a bellwether might alter over time, the biggest and most well-known businesses usually are included in this category.

An example of a bellwether stock is:

  • FedEx (FDX): Delivers items to customers and companies worldwide.
  • Given its extensive exposure to the construction, industrial, and agricultural sectors, notably in China, Caterpillar (CAT), the biggest manufacturer of heavy-duty equipment worldwide, has been seen as a bellwether.
  • The measure of the state of the manufacturing industry: 3M (MMM)
  • One of the biggest firms in the world is Apple (AAPL). Important, especially for chipmakers that are major suppliers.

2) The Earnings Downturn

When firm profits decrease yearly for two consecutive quarters, it is considered an earnings recession. Although profits are a significant component in long-term stock market returns, an earnings recession does not always follow an economic slump.

As seen in the table below, only two of the previous six US wage recessions had an accompanying economic downturn. The red circles indicate areas where earnings and an economic recession occurred, whereas the blue circles indicate areas where there was just an earnings recession.

earnings season

3) Weighting of earnings and stock index

Investors should know that some companies will substantially influence the overall index when results are traded due to their index weighting. For instance, when trading the Dow Jones, the release of Boeing’s earnings will significantly impact the index, whereas Visa’s impact is likely to be less significant. This is because the former has a weighting of 9.49 percent compared to Visa’s 4.41 percent, as shown in the table below. This emphasizes how crucial it is to closely monitor bellwether companies and how they may affect a broader equities index.

earnings season
Source: DailyFx
TOP TIPS FOR TRADING DURING EARNINGS SEASON

Although we have a detailed tutorial on how to trade earnings season, the following points should be kept in mind:

1) Understand the “anticipated” outcomes

Knowing what is “anticipated” in revenue/sales and profits per share (EPS) statistics is crucial since a company’s share price response is often based on how much it exceeds or falls short of an aggregate of analysts’ expectations.

2) Pay attention to unexpected announcements

Any unexpected announcements that coincide with an earnings release may also affect a company’s share price. These might include plans for repurchasing shares of stock as well as corporate direction.

3) Recognize the consequences of stock-to-stock spillovers.

If a shareholder owns shares of a chipmaker, such as Dialog Semiconductor, profits from Apple might significantly influence the stock. This is an example of a spillover effect. As a result, it is crucial to evaluate connected stocks since they may indicate a sector’s future and lead to a potential sector rotation.

4) Take volatility into account instead of an anticipated move’s bearing.

Determining the “anticipated move” for stock in response to the binary earnings event may be difficult. A perspective adopted instead with volatility in mind may better prepare investors for significant fluctuation without placing them on the negative side of the final result.

KEY TAKEAWAYS FOR INVESTORS AND STOCK TRADERS FROM THE EARNINGS SEASON

In conclusion, the earnings season may impact a trader’s performance. To proactively prepare, be crucial to stay up to speed on the dates when various firms announce their significant results. Be mindful of how stock index weightings, probable earnings recessions, and bellwether stocks may affect price changes. Keep tabs on the anticipated outcomes for each stock, be aware of higher potential volatility for analytical or strategic objectives, and be aware of how one stock’s performance may affect another (or an index as a whole).

The trader might try to weather the earnings season and manage the time more consistently by heeding this critical advice.

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