Earnings season demonstrates how the financial fortunes of a company can, and do, change over time. As an investor, you should be aware of these fluctuations and understand what they mean for your holdings.
What is earnings season?
Earnings season refers to the periods throughout the year during which publicly listed companies release their earnings reports to the public. Earnings will be released by companies before the market opens, or after the market closes. This tends to happen quarterly (quarterly reports), following most major companies’ fiscal quarters.
- January-March: Quarter 1 (Q1)
- April-June: Quarter 2 (Q2)
- July-September: Quarter 3 (Q3)
- October-December: Quarter (Q4)
Each earnings season generally lasts about six weeks. While there is no official start or end date, each season is typically considered to be over once most major companies have released their quarterly earnings reports. An earnings reports calendar can help you to track the most important dates relating to earnings season.
For investors who wish to capitalise on events outside of regular trading hours, such as reacting to earnings reports or making trades before the broader market responds, consider a broker with extended trade features. Extended hours trades are typically executed as CFDs, with little to no cost difference in fee terms between after-hours and regular-hours traded instruments (although spreads might vary according to fluctuations in trading liquidity). Investors should be wary to avoid “FOMO investing” though, and ensure to stick to their overall strategy regardless of when a trade occurs.
Tip: Some companies’ fiscal years don’t correspond with the standard calendar year, so they report outside of typical earnings seasons.
As much as quarterly results reports are a tool for investors, and can be the subject of much analysis; they are also a legal requirement for public companies. It is worth noting that public companies must meet different requirements in different countries. For example, in the US, the Securities and Exchange Commission (SEC) requires companies to report on their earnings every quarter.
Why is earnings season important?
Earnings season is an important period for investors, as it provides analysts with the most up-to-date information about a company’s financial standing to inform their reports about the intrinsic value of its stock. Subsequently, a company’s earnings season can play a large role in the performance of its stock, and can often trigger sharp price movements in the market.
Investors should be aware of the risks and opportunities associated with earnings season, and understand what information they need to know in order to trade earnings season effectively.
What are earnings reports?
An earnings report is a public document issued by a publicly traded company that shows a company’s profit or loss. The basic calculation is:
- Revenue (the total income of a company) minus costs (the total outgoings of a company).
For investors, the most important thing to ascertain from an earnings report is whether or not a company is profitable. Investors can use profit to determine whether the company’s shares are worth investing in.
If a company is making money every quarter, it is more likely to be a good investment than if it is losing money. Not only will investor sentiment be higher, but consistent profit throughout both good and bad economic times also demonstrates strength and stability.
What is an earnings call?
A publicly traded company will often follow an earnings report with an “earnings call.” Earnings calls aren’t mandatory, but they are common.
An earnings call is similar to a press conference in the sense that it usually features a presentation to the public from a company’s CEO, including a recap of the latest quarterly report with further context and explanation. Analysts and members of the media are then able to ask questions and make comments.
Although members of the public can’t interact with an earnings call, it is sometimes possible to watch them, whether in real time or via a recording, in order to gain insights into a company’s financial health.
Expectations during earnings season
Investors should ensure that they not only know what happens during earnings season, but also understand what to expect from earnings season, and be informed about how to use it as a tool of fundamental analysis that can be used to guide investment decisions.
When scrutinising earnings reports and analysing seasons, the initial focus should always be on understanding what the anticipated performance of a company looks like. These predictions usually come from analyst forecasts.
It is crucial for investors to recognise that a company’s stock value, especially leading up to an earnings report, is driven more by expectations than actual performance. For anyone evaluating the value of a company, surpassing or falling short of earnings expectations is a crucial indicator.
For instance, if Company X was projected to make a 10% profit, but only reported a 1% increase, it is considered negative as earnings fell below expectations. Similarly, if a company were to make a loss, but that loss was lower than expected, it could be viewed as a positive.
What are analyst forecasts?
Analyst forecasts, also known as earnings forecasts, are reports that aim to predict a company’s growth and profitability. The aim of analyst forecasts is to look at a company from a variety of angles to assess its true value and, in turn, its future potential.
Analyst forecasts are not guarantees of the future, but they should be treated as carefully researched reports based on empirical data and market experience. They usually include insights into economic growth rates, currencies, a company’s underlying financial status, current performance and other macroeconomic factors.
These forecasts are particularly important during earnings season, as many investors look to the reports published by major Wall Street analysts to inform their investment strategies. Indeed, if consensus exists among analysts regarding the outlook for a certain company, then that forecast can impact share prices.
Tip: Survey a variety of analyst forecasts during earnings season, and form an opinion based on various points of view.
Analysing earnings season
There are various ways for investors to navigate the earnings reporting season, but regardless of the strategy, it should be grounded in facts, data and opinion. Consider the following three points for effective market analysis before, during and after earnings season:
- Use your own market knowledge: Conduct independent research on a company’s history, recent performance, expected earnings and overall market conditions.
- Incorporate company insights: Examine the data provided by the companies you are tracking. Beyond earnings figures, review company guidance and consider what company executives anticipate happening in the coming months. Evaluate expectations in comparison to your own analysis and that of investment banks or analysts.
- Factor in analyst forecasts: Recognise the significance of analyst predictions during earnings season, as they can often provide valuable insights into company performance, and also influence share prices. As market fluctuations are expectation-driven, bullish sentiment can potentially result in price increases.
There are various plays for investors to make during the earnings reporting season, but regardless of the strategy an investor chooses to use, it should be grounded in facts, data and opinion.
Only by understanding the true value of a company can you assess its potential and, in turn, whether or not its shares are worth buying. Earnings season is the perfect time to do this.
What else should you look for during earnings season?
As well as looking at what experienced analysts predict, there is value in reading financial reports yourself to better understand the market during earnings season, and assess how companies are performing.
Important metrics to look for include:
- Gross revenue: The total income a company has made during the last quarter or reporting period, before any deductions.
- Net income: Also referred to as “net earnings” or “net profit/loss,” this is the total amount of sales or revenue minus costs, representing the profitability of a company.
- Operating profit (EBITDA): How much profit a business makes for every unit it generates in revenue. EBITDA can be used to evaluate how profitable a company is based on its income and expenses. EBITDA stands for “Earnings Before Interest, Taxes, Depreciation and Amortisation.”.
- Earnings per share (EPS): A company’s profit divided by the outstanding shares of its common stock. This calculation indicates how much money a company makes per every share of its stock.
How to trade during earnings season
Earnings season can present valuable information relating to the future prospects and performance trends of a company, or a sector, which can guide an investor’s long-term investment strategy.
One such approach is to react to the data provided in earnings reports, and make trades based on new information and sentiment about the perceived success and profitability of a company. Comparing historical data can help investors to determine whether a company is growing or not.
There are also various trading strategies that investors can deploy during an earnings season to optimise any expected price movement. For instance, some investors might opt to act more strategically, and engage in trades ahead of earnings season, relying on predictions about a company’s earnings data in an attempt to capitalise on the expected upswing or downturn before the market reacts.
For instance, investors should recognise that shares are typically most volatile leading up to, and following, the publication of earnings reports. Stocks often rise in anticipation of positive earnings results, and fall prior to earnings reports that are expected to show negative results.
In addition, earnings data about any one company within a specific sector can influence similar stocks. For instance, a positive earnings report from one AI company is likely to influence price action on other AI-related stocks. Understanding this trend can present strategies for sector-specific investment around earnings season.
With a well-executed pre-earnings strategy, investors can seek to leverage this market volatility to their advantage.
Knowing when earnings season starts will enable investors to enter trades a week or two prior to a company’s reporting date. In addition to establishing an immediate position, investors can also arrange to sell right after the earnings call concludes.
Final thoughts
Earnings seasons play a crucial role for investors, offering a prime opportunity to thoroughly assess a company’s performance and the accompanying market sentiment.
Understanding the intricacies and nuances of these periods presents insights that can be used for proactive planning, both for long-term investment strategy and to potentially enhance the execution of short-term trades.
Visit the eToro Academy to learn more about trading during earnings season.
FAQs
- What is the best investment strategy to use during earnings season?
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Predicting how a stock will be affected during earnings season can be difficult due to the increased volatility. However, if it appears that an organisation will post strong earnings and that the stock could rise afterwards, you could purchase the stock before an announcement. It is important to familiarise yourself with the way in which earnings season works when building your investment portfolio.
- How accurate are analysts’ forecasts?
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Analyst forecasts are usually based on a number of factors and their expectations around a company’s growth and how much profit they could make. Since this can differ between each analyst and they can never guarantee what will happen, it is important to form an overall judgement based on various points of view.
- How do earnings reports affect stock trading?
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A company’s earnings report will give a strong indication of how it has performed and its future plans. This will either attract more investors or cause current investors to sell their shares, which will impact stock prices.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
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