What is Earnings Season and What to Consider in Earnings Reports?

Earnings season is a period each fiscal quarter, usually lasting several weeks, when many of the largest listed companies release their latest

FX Desk·July 27, 2022

WHAT IS EARNINGS SEASON AND WHY IS IT IMPORTANT?

Earnings season is a period each fiscal quarter, usually lasting several weeks, when many of the largest listed companies release their latest financial accounts. An earnings report consists of revenue, net income, earnings per share (EPS) and forward-looking outlook, as well as many other data points that can help provide investors with insight into the company's current health and outlook. This information can be found on sec.gov, in various financial publications and on companies' own websites. Earnings season is important because it helps market participants glean information from the companies they track along with the broader index. For example, a strong Apple (AAPL) earnings report could see traders become bullish on Nasdaq 100 futures.

WHEN IS EARNINGS SEASON & WHEN DO REPORTS COME OUT?

Earnings season usually takes place a few weeks after each quarter ends (December, March, June, September). In other words, earnings season starts in January-February (Q4 results), April-May (Q1 results), July-August (Q2 results) and October-November (Q3 results), and the unofficial start of earnings season is usually when major US banks release their results.

3 THINGS TO LOOK OUT FOR IN COMPANY EARNINGS REPORTS

There are a number of factors to look for in corporate earnings reports. Investors should pay most attention to the performance of the largest 'bellwether' stocks, understand the significance of earnings stagnation in a particular stock, and recognize how a stock's earnings announcement may affect a related index depending on the weighting of that security.

1. Performance of Bellwether stocks

When analyzing company earnings, it is important to pay attention to 'bellwether' stocks, which can be seen as an indicator for the performance of the macro-economy. While the status of a bellwether stock can change over time, the largest and most established companies are typically considered bellwether stocks.

2. Earnings recession

An earnings recession is defined as two consecutive quarters of year-on-year declines in corporate profits. However, while earnings are an important factor in stock market returns over the long term, an earnings recession does not necessarily coincide with an economic recession. The chart below shows that only two of the last six US earnings recessions have coincided with an economic recession. Blue circles represent places where earnings recessions have occurred without an economic recession, while red circles represent places where both earnings and economic recessions have occurred.

3. Earnings and stock index weighting

Traders should understand that when trading earnings, certain stocks will have a greater impact on the broader index relative to their index weighting. For example, when trading on the Dow Jones, Boeing's earnings announcement will have quite an impact on the index, while Visa will probably not have as much impact, because the two carry very different weights in a price-weighted index. Those weights move with the share prices. The 9.49% against 4.41% split quoted here dates from 2022. Current weights have to be read from the index provider. This highlights the importance of paying close attention to the leading stocks and how they may affect the broader stock index.

TRADING DURING EARNINGS SEASON: TOP TIPS

1. Know the 'expected' outcomes

It is important to be aware of 'expectations' for revenue/sales and earnings per share (EPS) figures, as a company's share price reaction can often be determined by how much it exceeds or misses the sum of analysts' expectations.

2. Be on the lookout for surprise announcements

Surprise announcements that coincide with an earnings report can also affect a company's share price. These can include share buybacks/share repurchase programs and company guidance.

3. Be aware of spillover effects between stocks

As an example of a spillover effect, if an investor has a chipmaker stock in their portfolio (e.g. Dialog Semiconductor), earnings from Apple could have a large impact on the stock. As a result, it is important to evaluate related stocks as they can reveal the outlook for a sector and thus trigger a possible sector rotation.

4. Consider the volatility that an expected move will carry

Calculating the directional 'expected move' for a stock in reaction to a binary earnings event can be a troublesome endeavor. Alternatively, a perspective that considers volatility can prepare investors for a significant move without positioning them on the wrong side of the final outcome.

EARNING SEASON: KEY TAKEAWAYS FOR INVESTORS AND TRADERS

In summary, earnings season can be an influential factor in an investor's experience. Be sure to keep track of when key earnings will be announced for each company so that you can plan proactively. Be aware of how bellwether stocks, potential earnings recessions and stock index weightings can affect price movements. Master the expected outcomes for each stock, pay attention to larger potential swings for analytical or strategic purposes, and understand how the performance of one stock can affect another (or the index as a whole). Following these basic tips can help the investor try to get through the earnings season and get through the period more consistently.

Continue in the iEconomy Academy: Dividends: dates, yield, tax, ETFs and how funds track value. Terms used in this lesson: Volatility, Portfolio.

Frequently asked questions

What is earnings season and why does it matter for the stock market?

Earnings season is the recurring period, typically lasting several weeks after each fiscal quarter ends, when a large number of publicly traded companies release their quarterly financial reports. It is important because these reports provide critical, standardized data on company performance, allowing investors and analysts to assess corporate health and adjust market valuations, which can drive significant price movements across individual stocks and broader indices.

What are the key components to look for in a company's earnings report?

Key components of an earnings report include revenue, net income, and earnings per share (EPS), which measure sales, profitability, and profit allocated to each share, respectively. Additionally, the management's forward-looking guidance or outlook is crucial, as it provides insight into the company's expected future performance and can significantly influence investor sentiment.

When does earnings season typically occur each year?

Earnings season generally occurs in the weeks following the end of each fiscal quarter. The main periods are January-February for Q4 results, April-May for Q1 results, July-August for Q2 results, and October-November for Q3 results, corresponding to the quarters ending in December, March, June, and September.

Where can investors find official company earnings reports?

Official earnings reports are filed with regulatory bodies like the U.S. Securities and Exchange Commission (SEC) and can be accessed through its website, sec.gov. Companies also publish these reports on their own investor relations websites, and summaries are widely disseminated through financial news publications and data services.