Earnings season is one of the most closely watched times in the stock market calendar. For investors, analysts and finance junkies, it’s when companies show their cards on their quarter’s financial health — a snapshot of what’s been driving their performance. But what is earnings season in the stock market, why does it matter, and how can you make the most of it?
In this blog, we’ll take a closer look at what earnings season is in the stock market, why it is important for your trading, and how you can use it to make more informed decisions for your investments.
Understanding Earnings Season
What is earnings season in the stock market? It is the name given to the handful of weeks during each fiscal quarter in which publicly traded companies issue their earnings. These reports give investors a comprehensive view of a company’s bottom line (and top line) profitability, revenue, expenses and other important financial data. For investors, it’s a key chance to get a sense of how a company is using its resources and whether it is meeting growth expectations.
When Is Earnings Season?
There are four earnings seasons a year, one at the end of each fiscal quarter. With most companies reporting earnings just a few weeks after the quarter’s close, the months to pay attention to are January, April, July and October. What is earnings season in the stock market without its unofficial kickoff? It generally gets underway with Alcoa, a major industrial metals company.
Companies from different industries typically report their results over the course of several weeks after Alcoa.
Why Earnings Season Matters
What is earnings season in the stock market without price movement? It matters because it gives us more information to work with, influencing stock prices, market direction, and overall investor mood. Here are three reasons it matters:
Stock Price Volatility
Earnings announcements often result in abrupt swings in stock prices. Then, if a company beats expectations, its stock may shoot up as investors jockey for position. Conversely, disappointing earnings can send stocks tumbling. It’s been a volatile time, and this introduces some challenges and opportunities for investors.
Example:
Picture a large tech company, say Apple, which crushed earnings expectations because of its new line of iPhones. The market responds favorably, and Apple’s stock rises. Conversely, if Apple delivers weaker-than-expected results, its stock could take a hit as expectations reset for investors.
Benchmark for Performance
Earnings season provides a benchmark for investors to compare a company’s performance with its peers. By examining several earnings reports, you become better informed about which companies are doing well and which may be struggling in this kind of economy.
Example:
For instance, if two rival retailers, like Target and Walmart, issue their earnings reports in the same season, you can compare things like their revenue growth, operating margins, and general financial condition, and decide which looks like a better investment.
Market Sentiment and Trends
More broadly, what is earnings season in the stock market without signaling broader economic trends? A string of stellar earnings reports from a number of companies can be a sign of a growing economy and too can also trigger a bull market. On the other hand, broad-based underperformance may signal that tough economic times are ahead.
What to Watch in Earnings Reports
Not all earnings seasons are created equal. To capitalize on this time period, you’ll need to know what to look for in a company’s financial disclosures. Here are the important numbers to consider:
Revenue
One of the most important numbers to watch is revenue, also known as total sales. Rising revenue usually means that a company is doing more business with more customers, because it’s selling more of its product to them.
Earnings Per Share (EPS)
The EPS figure shows how much profit a company generated for each share of stock. Analysts like it because it offers a consistent way to compare profitability between companies.
Guidance
Companies often include forward-looking statements or guidance in their earnings reports. These guidelines are a forward-looking statement and will not be updated by the company. Good guidance will often drive up the price with speculation of growth, and bad guidance will tend to drop the price.
Sector-Specific Metrics
Some sectors come with unique metrics that are crucial to measure success. For example, retail businesses care about same-store sales growth, and tech companies look at user growth and engagement.
How to Play Earnings Season as an Investor
Lost in the deluge of reports from earnings season, it can all be a little overwhelming. By taking the right approach, you can make this turbulent time a rich source of opportunity for your investment strategy.
Plan Ahead
Create a calendar of when important companies in your portfolio or watchlist are reporting earnings before earnings season starts. “You want to know when companies are going to announce results so you’re prepared and not caught off-guard,” he said.
Read Analyst Previews
Before earnings announcements, analysts frequently publish estimates on revenue, EPS, and other financial measures. And by comparing them to the business’s actual performance, it’s possible to dive deeper into understanding how the business is actually performing versus the company plan.
Look Beyond the Headlines
Don’t only look at the top-line numbers. Dive into the numbers behind the earnings report, with insights on profitability and operating efficiency, the balance sheet and financial model, and growth potential down the road. This extra push can unearth hidden strengths or vulnerabilities that may not be evident at first viewing.
Do Not React Emotionally
At a time like now, when the market is so volatile, it is likely an earnings season, do not make snap decisions based only on movement in stock price. Spend a minute or two to admire the data and to consider how it fits in with your investment plan.
Example:
If a stock you own falls in a big way after earnings are reported, try to figure out if the decline makes sense given the numbers. And if the company’s long-term fundamentals are still sound, then the downturn might be a chance to buy.
Earnings Reporting Season: What to Look For
Earnings season brings many such chances, but also risks. Knowing these detriments can help you make better decisions.
Overreacting to Short-Term Results
Don’t rush to buy or to sell based on one earnings report. One quarter’s worth of results from a company might not be a true reflection of its long-term potential.
Ignoring Context
Numbers alone don’t say everything. Factor in macroeconomics, industry trends, and recent events that could affect the company’s performance.
Forgetting About Diversification
It can be tempting to pile money into a company like that in the aftermath of a blowout earnings report, but overconcentrating in individual stocks is a good way to leave yourself vulnerable to volatility and risk. You should always have a diversified portfolio for investing your money.
How to Make Earnings Season Work for You
What is earnings season in the stock market really for investors? It is not only an opportunity to gain insights about individual companies, it’s also a time to fine-tune your investment approach and take the market’s temperature. By deconstructing reports, ignoring the noise, and paying attention to the most important metrics, you can make smarter decisions, become a more strategic investor.
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