17 January 2024
What is the earnings period and what is its significance?
What is the earnings period and what is its significance?
The earnings period is a period of time in each fiscal quarter, usually spanning several weeks, when many large listed companies disclose their latest financial results. Earnings reports include revenue, net income, earnings per share (EPS) and future projections, as well as other metrics that help investors assess a company's current position and prospects. This data is available in various financial publications and on the websites of the companies themselves.
The importance of earnings season manifests itself in the opportunity for market participants to get information from the companies they follow as well as the broader market index. For example, a strong financial report from Apple (AAPL) can influence investor decisions on Nasdaq 100 futures, as we'll discuss below when analyzing the leader stock.
An additional element that accompanies earnings reports is the conference call. This is a meeting between the company, analysts, members of the press, and investors to discuss the results of the financial report and provide an opportunity to ask questions of the company's management. This thorough dissection of the reports provides traders with additional information to inform their decisions, although not all companies hold such conferences.
When is revenue season and when do the financial statements appear?
Revenue season typically begins a few weeks after the end of each quarter (December, March, June, September). In other words, the start of earnings season covers approximately January-February (Q4 results), April-May (Q1 results), July-August (Q2 results), and October-November (Q3 results). The unofficial start of earnings season is often considered to be when the major U.S. banks report their results. This usually coincides with an increase in the volume of financials being reported, and the unofficial end of earnings season is usually when Walmart (WMT) reports its earnings.
3 key aspects to highlight when analyzing a company's earnings reports:
- Performance of leading stocks (Bellwether): When studying company earnings, one should look at stocks that act as indicators of macroeconomic performance. While this status varies over time, large and well-known companies are generally considered leading stocks. Examples of such stocks might include FedEx (FDX), Caterpillar (CAT), 3M (MMM), and Apple (AAPL). These companies play important roles in a variety of sectors and can serve as key indicators to gauge overall economic activity.
- Earnings Decline: Earnings declines, defined as two consecutive quarters of year-over-year earnings declines, are an important aspect of the analysis. However, it should not be automatically assumed that a decline in earnings necessarily indicates the onset of an economic recession. The graph provided above demonstrates that not all instances of earnings declines coincide with periods of economic recession. This emphasizes the importance of a cautious approach to interpreting earnings declines and their relationship to overall economic health.
- Impact on indices based on a stock's weight: Traders should be aware of how a stock's earnings announcement may affect the relevant index, given the weight of the security in the index. Companies with a higher weighting may have a greater impact on the index when they disclose their financial results. Understanding this interaction can help traders make more informed decisions when forming strategies in response to earnings reports from leading companies.
Analyzing these three aspects together will provide a more complete understanding of a company's financial position and its impact on the market.
Tips for trading during earnings season:
- Knowing "expected" results: Understanding expected revenue, sales and earnings per share (EPS) is an important aspect of trading. The market's reaction to a company's report often depends on whether the results exceed or fall short of analysts' general expectations.
- Attention to unexpected announcements: Any unexpected announcements that coincide with a financial report can have a significant impact on a company's stock price. These could include share repurchase programs, changes in the company's management, and other factors that should be considered in the analysis process.
- Be aware of spillover effects between stocks: Understanding related stocks and their correlations becomes important when analyzing the reaction to a company's earnings. For example, if you have shares of a chip manufacturer in your portfolio, earnings from large companies such as Apple can have a significant impact on their share price. This emphasizes the need to consider spillover effects and possible sector rotation.
- Accounting for volatility in response to expected movement: Developing an expected movement for a stock in response to a binary earnings event requires attention to the level of volatility. Accounting for volatility helps investors prepare for possible significant movements despite the uncertainty of the final outcome.
Earnings season is an important period for assessing the health of the global economy, but its impact depends on various factors. Here are a few aspects to consider:
- Performance of certain sectors: The performance of companies in different sectors can serve as indicators of the health of those sectors and therefore part of the economy. For example, strong performance in the technology sector can indicate high innovation and activity in that area.
- Stock Market Impact: Stock market reactions to company results can reflect overall investor confidence in the economy. Positive reports may boost the market, while weak results may cause a decline.
- Relation to financial downturns: Financial downturns can have a significant impact on earnings season. Reduced demand and economic instability can lead to unpleasant results for many companies. However, as noted, some sectors, such as consumer staples and healthcare, can be resilient in a downturn.
Regarding the dates of the US and UK earnings season, it is worth noting that these dates do not always coincide. Typically, the U.S. earnings season starts first, followed by the U.K. and European seasons. British and European companies typically release their financial reports about two to three weeks after U.S. companies. However, the exact dates may vary depending on specific companies and annual cycles.