Everything you need to know about earnings season

What is earnings season?

Earnings season is a period during which a range of public companies tend to release their earnings reports for the consideration of shareholders, traders and the general populace. In the US, quarterly fiscal reports are mandatory for public companies, but in the UK, this is no longer the case. Australian reporting season sees ASX-listed companies report their earnings at least twice a year.

When is earnings season?

Earnings season in the US generally begins a few weeks after the end of each quarter. For Q4 results, earnings season would take place around January-February time, for Q1 results around April-May, Q2 results around July/August, and Q3 results around October/November.

When the major US banks report results, the start of earnings season is widely considered to have arrived. After this point, the rate at which earnings are released tends to accelerate, and the unofficial end of earnings season is often marked by Walmart releasing its report.

The UK and Europe tend to get much of their earnings data a week or two after the US.

What is an earnings report?

An earnings report is a document providing details including a company’s revenue, earnings per share, and net income, as well as a picture of future expectations. With such information, traders and investors can expect to gain insight on the overall health and prospects for the company.

Here are the main earnings report features of interest to market speculators:

Revenue – also known as top line – represents gross sales or income before expenses such as payroll and utilities are deducted. While revenue fluctuations will give some insight into the performance of particular products and services, they do not tell the whole story, as strong sales but significant expenditure can equal a loss-making position. Therefore, revenue should be scrutinized alongside expenses to come to a profit figure.

Net income – also known as bottom line – represents the profit earned for a period, calculated by subtracting costs from revenue. Profitable companies are naturally more likely to survive, thrive, and attract future investment.

Earnings per share (EPS) reveals how much money a company makes per share of its stock, making it key for estimating corporate value. A higher EPS demonstrates a higher value as it is a measure of strong profitability.

Earnings report information can be found on sec.gov, on company websites and across a range of financial publications.

What is an earnings call?

An earnings call is a conference that takes place between company executives and its shareholders, the media and analysts, where an earnings report outcome is discussed. In the call, management will often answer questions from those present so more background information can be learnt about the report.

How does earnings season affect stock prices?

Earnings season can be a key fundamental driver of stock prices. For example, if the market anticipates a strong earnings report for a particular company, but the company misses analyst predictions, there may be significant downward pressure on a stock. Conversely, better-than-expected earnings may rouse bullish interest, as can be seen below following Alphabet’s earnings release in February 2021.

However, the link between earnings and stock prices isn’t always so predictable. There are a range of other fundamental factors at play that can impact on a stock’s price once earnings have been released, that market speculators should consider. To this end, any significant price movements following earnings releases may well be short-lived.

Earnings report trading strategy

Applying an earnings report trading strategy involves identifying the right stocks to follow, putting the time in to research their estimated earnings compared with analysts’ expectations, and planning whether to go long or short. Predicting a given company’s earnings can be extremely difficult, but thorough planning can give speculators the best chance of capitalizing on moves.

Identify the right stocks

Identifying the right stocks is crucial in preparation for trading earnings. But what constitutes ‘right’? Well, it’s probably best to choose stocks you know or already trade, so you can use existing knowledge of how price reacted to previous earnings. It may also be advisable to keep the number of stocks you trade on the smaller side, to make your efforts more focused.

Larger stocks with high volume whose results are more likely to impact wider industries (known as bellwether stocks) can allow you to learn more about potential price moves across the entire sector.

A few key bellwether stocks to consider

Research your stocks

Researching your stocks involves looking at estimated earnings compared to analysts’ expectations, as well as learning about prior earnings performances and, naturally, being aware of the earnings release dates you plan to follow.

Also, be sure to monitor any changes in other fundamental drivers that might affect a stock’s price, such as interest rates and supply and demand factors around earnings releases, to give a better picture of how price action might go post-release.

Remember, while past results may give clues on how a specific stock might react to upcoming earnings reports, price action in response to reports can be unpredictable. Earnings that are better than expected may not yield subsequent price gains just as disappointing earnings may not be the harbinger of a bear run.

Create an earnings strategy

When applying an earnings strategy, you should consider the high level of risk that comes with potential spikes in volatility and pay particular attention to a risk management plan, including profit goals, stop placement and hedging where necessary.

Also, those who favor technical analysis should be aware that earnings releases have the potential to disrupt ongoing price trends, making it wise to place less emphasis on indicators such as key Fibonacci retracements at this time.

Around earnings, traders should be aware of the consequences of implied volatility, or how the market sees the probability of change in a security’s price.  When implied volatility stays high in the period up until an earnings release, but collapses soon afterwards, the resulting ‘IV Crush’ can create opportunities known as straddles or strangles.