Investing & Trading During Earnings Season: 5 Solid Tips to Assist You

By Chika


Last Updated: April 16, 2022



Earnings season is a perfect time for investors because it provides an opportunity to gain better insight into the businesses they've invested in.

The financial report released during earnings seasons provides information on how a company is doing and how it might perform going forward. It also sheds light on how the possible risk factors, challenges and how the management view the company's performance in the short term.

This provides context for investment decisions and possible price action on the company's stocks. As a result, traders and investors look forward to the earnings season because it has significant implications for future portfolio returns and price swings on the stock. 

Let's read on to learn more about earnings season, and what to look for in an earnings report.


When is Earnings Season?

Earnings season is a period during each fiscal quarter, generally lasting a few weeks. This is when many of the largest publicly traded corporations release their most recent financial statements in a report called Form 10-Q.  

There is no specific date, but earnings season usually begins a few weeks after the conclusion of each quarter (December, March, June, September).

In other words, the formal start of earnings season is traditionally defined by when the big US banks announce results in:

  • January-February (Q4 results)
  • April-May (Q1 results)
  • July-August (Q2 results)
  • October-November (Q3 results)


The Importance of Earnings Season

An earnings report includes information such as...

  • sales
  • net income
  • earnings per share (EPS)
  • forward guidance

...among other things, that can assist investors understand the company's present health and prospects.

The data released is then compared with analyst estimates from before earnings season to determine how a company did versus how it was expected to do.

Earnings season is important because it helps market participants glean information from the company, which in turn would affect how they invest or trade the stock.  For example, a strong earnings report of Netflix may see investors bullish on the stock. 

The earnings report of a company could also be used as a litmus test to judge the performance of other companies in the same industry. The information shared during earnings season can offer specific details about trends in the sector, and the pace of economic growth more broadly.

As a result, a poor earnings report could affect investor sentiment towards another stock in the same industry. For example, if Target releases a poor fiscal report, it could affect investor sentiment towards Costco and Best Buy. 

Earnings release are usually accompanied by an earnings call.

This is a conference where the company discusses the outcome of its earnings report with analysts, press and investors. They offer the public an opportunity to scrutinize the report and seek further clarification on the information provided.

Company executives answer questions about the activities of the company during the fiscal period.


3 Things to Look Out for During Earnings Season

There are a number of factors to look for in company earnings reports. 

Bellwether stocks

Traders should be most mindful of:

  • the performance of the largest bellwether stocks
  • understand the significance of an earnings recession in a given stock
  • grasp how a stock’s earnings announcement might impact a relevant index, or
  • indicate the direction which the economy is headed to

While the status of a bellwether stock can change over time, the largest and most-established companies are typically considered a bellwether stock.

Some examples of bellwether stocks are:

  • Apple
  • Google
  • American Airlines (NASDAQ:AAL)
  • Carnival (NYSE:CCL)
  • FedEx (FDX)

Earnings recession

Two consecutive quarters of year-over-year falls in corporate profits are regarded as an earnings recession. While earnings are a significant component in long-term stock market returns, an earnings slump does not always correspond with a downturn in the economy.

Only two of the last six US earnings recessions have coincided with an economic downturn. 

Earnings and stock index weighting

Earnings seasons also provide information on index weightings, which could affect the performance of the index. For example, investors may decide to invest more in Apple stock based on a positive earnings report which exceeds analysts, and ultimately affecting how the index performs.

We can see this from the Nasdaq where FAANG stocks make up 33% of the index weightings. As a result any positive or negative price action of the FAANG stocks would affect Nasdaq's performance. 


5 Tips for Investing and Trading During Earnings Seasons

1. Be aware of the ‘expected’ results.

You have to be aware of the expected earnings results from the company. Analysts usually have a forecast of the company's performance. This is based on the company's historical performance and the macro economy.

As such, this would determine whether investors believe whether the company would perform well or not. For example, a decrease in earnings is usually taken as a sign that the company is not doing well, leading to a sell-off.

2. Look out for surprise announcements.

Any surprise announcements that coincide with an earnings report can also impact the share price of a company. These may include stock buybacks/share repurchase programs, as well as company guidance.

Following our example above, if the company surprises and beats analysts forecasts by increasing its earnings, this would lead to a bullish move in the stock. 

3. Carry out a cross-section analysis for broader perspective.

Earnings reports give us an insight into how the economy is doing. As a result, restricting your research to a particular stock or sector may not give you a good picture.

A cross-sectional and multi-industry analysis should be carried out. For example, if over 75% of companies in the S&P 500 beat analyst forecasts, it's a very strong indicator the economy is doing well.

4. Be aware of spillover effects between stocks.

Earnings reports of a company can have spillover effect on other stocks in the sector. This is because companies in the same sector are usually exposed to the same market. As such, they tend to have similar challenges and opportunities.

As a result, the way a company performs may provide a hint on how a competitor would perform. This could thereby influence investor sentiment towards other stocks in the same sector.

However, this is not always the case. Companies in the same sector; despite competing in the same market and being exposed to its inherent challenges and opportunities; usually have different fundamental factors. 

  • cash flow
  • company structure
  • experience of board members
  • control of market share or product portfolio

These can ultimately play a significant role in their long-term financial performance. 

5. Consider every scenario carefully.

Try as much as possible to consider all scenarios that may play out in the company's report. More importantly, how will the market react to the report? Sometimes the market may move against expected direction, so it's important that you consider all scenarios.

For example, a company's stock could fall despite beating earnings forecasts, because this expectation was already priced into the stock prior to release of its earnings.

An analysis taken with volatility in mind instead can prepare investors for significant movement without positioning on the wrong side of the eventual outcome.


Key Takeaway

In conclusion, earnings season may have a significant impact on a trader's experience. Make sure you're up to speed on when significant earnings for certain firms are announced so you can prepare beforehand.

Be mindful of how price changes are influenced by bellwether stocks, future earnings recessions, and stock index weightings.

Keep track of what each stock's predicted outcomes are. Be aware of higher potential volatility for analytical or strategic reasons. Grasp how one stock's performance affects another's (or an index as a whole).

Following these crucial pointers can help an investor make more money during earnings season.



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