Everything you need to know about earnings season

Earnings season gives investors key insights into the outlook of a company, and traders the opportunity to speculate on volatility. Learn more about what earnings season is and how to take advantage of it. 

• What is earnings season?
• When is earnings season?
• What is an earnings report?
• What is an earnings call?
• How does earnings season affect stock prices?
• Earnings report trading strategy

What is earnings season?

Earnings season is a period during which a lot of public companies release their earnings reports, which contain information about the company and its finances, as well as trends in the industry and economic growth more broadly.

The information gives shareholders and traders insights into the outlook for a company, which can influence decisions about whether to buy or sell shares.

When is earnings season?

There’s no set start or end to earnings season, but it generally begins a few weeks after the end of each quarter and lasts for six weeks after the first report.

In the U.S., companies have up to 45 days from the end of the quarter to file their financial information with the Securities and Exchange Commission (SEC). This gives us a general timeline of:

1. First quarter (Q1) earnings season – the financial quarter ends on March 31, so earnings season often begins in mid-April and runs until the end of May
2. Second quarter (Q2) earnings season – the quarter ends on June 30, so earnings season normally starts in mid-July and runs until the end of August
3. Third quarter (Q3) earnings season – the financial quarter ends on September 31, so the earnings season starts in mid-October and runs until the end of November
4. Fourth quarter (Q4) earnings season – the financial quarter ends on December 31, so the earnings season begins in mid-January and runs until late February

However, the dates of reporting aren’t the same for each segment of the economy, which creates a standardised order of proceedings by sector.

It kicks off with the major US banks reporting, and usually ends with retailers. That’s because the retail segment’s fiscal calendar is one month behind most other sectors, so instead of finishing Q4 on December 31, they finish on January 31, and so on.

The UK and Europe tend to release their earnings data a week or two after the U.S.. In the UK, quarterly earnings are not mandatory, but a lot of LSE-listed stocks choose to partake in earnings season due to the multinational nature of the market.

Australian companies listed on the ASX have to report earnings at least twice a year, and usually coincide with U.S. earnings.

What is an earnings report?

An earnings report is a collection of financial statements that companies issue during earnings season, which details their profits (or losses) over the previous financial period. It’s divided into three sections:

1. The balance sheet – reports a company’s assets, liabilities and shareholder equity
2. The income statement – shows a company’s revenues, expenses and profitability
3. The cash-flow statement – summarises the amount of cash and cash equivalents entering and leaving a company

Together, these documents allow investors to take a peek under the hood of a company’s operations and see how they’re currently performing, and how that might change in the future.

Learn how to read an earnings report.

There are a huge number of different figures that are covered throughout these three statements, but there are a few that analysts and market participants keep their eye on. These are:

• Revenue – also known as the top line – is the money a company makes from its business operations. Companies will focus on revenue figures as a way of assessing demand for products and services, but it’s important to look at how it stacks up against net income. A high revenue coupled with a low or negative net income means a company isn’t managing its costs effectively, and this can be cause for concern. Learn more about revenue
• Net income – also known as the bottom line – is the profit earned for the period. It’s calculated by subtracting costs from revenue. Investors look at net income to decide whether a company is stable, as consistent profits mean it’s more likely to survive, thrive, and attract future investment. Find out more about net income
• Operating expenses is the money a company has spent throughout the quarter in order to make its products. It includes things like research and development, marketing, employee salaries and so on. While these detract from net income, some expenses are viewed positively by markets. For example, investment into R&D or additional headcount can be a sign the company is expanding and confident in its future
• Earnings per share (EPS) is a popular metric that measures how much money a company makes per share of its stock. It is one of the most-talked-about figures to come out of a company’s earnings report, as it’s a key way of estimating corporate value. A higher EPS demonstrates higher profitability, which means more money available for reinvestment or paying a dividend to shareholders. Learn about financial ratio analysis

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

For the latest earnings news, visit our news and analysis hub.

What is an earnings call?

An earnings call is a conference that takes place between a company’s executives and its shareholders, the media and analysts. In the call, management will discuss the earnings report and answer questions from those present, giving more background information on the company’s performance.

Not all companies give earnings calls. It’s standard practice among U.S. firms, but less common in the UK and elsewhere. If a company is having one, then details will be available on their investor relations hub.

How does earnings season affect stock prices?

Earnings season tends to bring a lot of volatility with it, as there’s a flurry of activity from traders entering speculative positions and long-term investors altering their holdings.

Ultimately, the volatility is driven by how the data in the reports compares with analysts’ predictions of the figures. The estimates are usually priced into markets, so the only time significant price swings occur is if markets are surprised by the real figures, as recommendations are updated. If the earnings are in line with expectations, there tends to be less fluctuation in 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.

However, the link between earnings and stock prices isn’t always so predictable. There are a range of other factors that can impact a stock’s price that market speculators should take into account, such as interest rates and economic data.

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 building a risk management plan.

1. Identify the right stocks

Identifying the right stocks is crucial in preparation for trading earnings. Now’s probably not the time to choose to trade a company you know nothing about. Instead, you should focus on companies that you have prior knowledge of and can understand how their share price reacted to previous earnings.

Some traders will choose to focus on larger stocks whose results impact wider industries, known as bellwether stocks. Not only do they experience high trading volumes, but their earnings can act as a guide for the rest of the sector.

 2. Research your stocks

Researching your chosen stocks involves looking at analysts’ expectations of the upcoming earnings, as well as learning about prior earnings performances and, naturally, being aware of the dates that the company earnings are on.

Remember, while past results may give clues on how a specific stock might react to upcoming earnings reports, price movements after reports can be unpredictable. Earnings that are better than expected may not experience price gains, just as disappointing earnings may not spark a bearish run.

3. Manage your risk

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 favour 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.

Start trading stocks this earnings season

You can speculate on shares via CFDs this earnings season with FOREX.com with hundreds of global stocks to choose from. Get started in just a few steps:

1. Open a FOREX.com account, or log in if you’re already a customer
2. Search for the company you want to trade in our award-winning platform
3. Choose your position and size, and your stop and limit levels
4. Place the trade

Or you can start trading shares risk free by signing up for our demo trading account.