Understanding Earnings Season and Key Elements to Look for in Earnings Reports

What is Earnings Season and Why is it Important?

Earnings season is a period each fiscal quarter, typically lasting several weeks, during which many of the largest listed companies announce their latest financial results. These reports include critical data points such as revenue, net income, earnings per share (EPS), and forward outlook, offering investors insights into the company’s current health and future prospects. This information can be accessed on sec.gov, various financial publications, and individual companies’ websites.

Earnings season is crucial because it provides market participants with vital information about the companies they are monitoring and the broader index. For instance, a strong earnings report from Apple (AAPL) might make investors bullish on Nasdaq 100 futures. This concept is particularly relevant when considering bellwether stocks.

In addition to earnings releases, some companies hold earnings calls. These are conferences between the company, analysts, press, and investors to discuss the earnings report and often include a Q&A session with company management. Such scrutiny provides traders with additional information to inform their decisions, although not all companies hold earnings calls.

When is Earnings Season and When Do Reports Come Out?

Earnings season typically occurs a few weeks after each quarter ends (December, March, June, September). Specifically, earnings seasons begin around January-February (Q4 results), April-May (Q1 results), July-August (Q2 results), and October-November (Q3 results). The unofficial start of earnings season is usually marked by major US banks reporting their results.

The season typically concludes around the time Walmart (WMT) announces its earnings report, which often signifies the unofficial end of the earnings period.

Three Things to Look for in Company Earnings Reports

Several factors are crucial when analyzing company earnings reports. Traders should focus on the performance of the largest bellwether stocks, understand the significance of an earnings recession, and grasp how a stock’s earnings announcement might impact a relevant index, depending on the weighting of the given security.

1. Performance of Bellwether Stocks

Bellwether stocks serve as a gauge for the macro-economy. These are typically the largest and most established companies, whose performance can indicate broader economic trends. Examples include:

– FedEx (FDX): Ships goods globally, providing insight into consumer and business activities.

– Caterpillar (CAT): As the world’s largest heavy-duty machinery maker, it reflects the health of the construction, manufacturing, and agricultural industries, particularly in China.

– 3M (MMM): A gauge for the manufacturing sector’s health.

– Apple (AAPL): One of the world’s largest companies, crucial for key suppliers, especially chipmakers.

2. Earnings Recession

An earnings recession is characterized by two consecutive quarters of year-on-year declines in company profits. While earnings are vital for long-term stock market returns, an earnings recession does not always coincide with an economic recession. Historical data show that in the past six earnings recessions in the US, only two aligned with economic recessions. Understanding this distinction is crucial for informed investment decisions.

3. Earnings and Stock Index Weighting

Traders should recognize that certain stocks significantly impact the broader index due to their weighting. For example, in the Dow Jones, Boeing’s earnings will be highly influential due to its 9.49% weighting, compared to Visa’s 4.41%. This highlights the importance of bellwether stocks and their potential impact on broader equity indices.

Trading During Earnings Season: Top Tips

To navigate earnings season effectively, consider these key tips:

1. Know the Expected Results

Understanding the expected revenue, sales, and EPS figures is crucial. A company’s share price reaction is often determined by how much it beats or misses analysts’ expectations.

2. Stay Alert to Surprise Announcements

Surprise announcements, such as stock buybacks or company guidance updates, can significantly impact share prices. Staying alert to these can provide additional insights into a company’s outlook.

3. Be Aware of Spillover Effects

The performance of one stock can affect related stocks. For example, earnings from Apple could significantly impact chipmaker stocks in an investor’s portfolio. Assessing related stocks can reveal sector trends and potential sector rotation opportunities.

4. Consider Volatility Over Expected Moves

Rather than focusing solely on the directional expected move of a stock, consider the volatility. Preparing for significant movement can help avoid positioning on the wrong side of the eventual outcome.

Earnings Season: Key Takeaways for Investors and Stock Traders

Earnings season can be a pivotal period for traders. Keeping track of key earnings release dates allows for proactive planning. Understanding the influence of bellwether stocks, potential earnings recessions, and stock index weightings can help predict price movements. Staying aware of expected results, potential volatility, and spillover effects ensures a well-rounded approach to trading during earnings season.

Earnings Season FAQs

What Does Earnings Season Tell Us About the Global Economy?

Earnings season’s impact on the global economy varies based on sector performance and other fundamental factors. While positive results from bellwether companies can indicate a strong corporate environment, the relationship between the stock market and the economy is complex and not always predictable.

How is Earnings Season Impacted by Financial Downturns?

Financial downturns can significantly affect earnings season. Reduced demand for products and services during a downturn or recession can lead to earnings misses in multiple sectors. However, defensive stocks in sectors like consumer staples or healthcare might perform better or even become more attractive.

Is Earnings Season the Same in the US and UK?

Earnings season dates differ between the US and UK. UK and European companies typically release their earnings about two to three weeks after US companies.