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Business profits: what they are and what to look for

The earnings season provides a great opportunity for stock traders to gain insight into the stocks they have invested in, while providing context for potential stock price movements. Read on to learn more about what earnings season is, earnings announcement dates to know, and what to look for in a earnings report.

WHAT IS THE EARNINGS SEASON AND WHY IS IT IMPORTANT?

The earnings season is a period for each fiscal quarter, usually lasting several weeks, in which many of the largest listed companies announce their latest financial accounts.

An earnings report consists of revenues, net income, earnings per share (EPS), and forward outlook, among a bevy of other data, that can help provide investors with information about current health and prospects for the company. This information can be found on sec.gov, various financial publications and websites of individual companies.

The timing of events is important because it helps market participants gather information from the companies they are tracking along with the broader index. For example, a strong Apple Earnings Report (AAPL) might see investors bullish on Nasdaq 100 futures, a concept discussed later when looking at the best stocks.

Something else that can accompany a release of earnings is a call to gain. It is a conference between the company and analysts, press and investors that discusses the outcome of a earnings report and, in many cases, opens the floor to questions to the company management. Such a relationship check can allow traders to access more information to further inform their decisions, although not all companies hold earnings calls.

WHEN IS THE EARNINGS SEASON AND WHEN DO THE REPORTS COME OUT?

The earnings season typically takes place a few weeks after the end of each quarter (December, March, June, September). In other words, earnings seasons start around January-February (Q4 results), April-May (Q1 results), July-August (Q2 results) and October-November (Q3 results), with the unofficial start of the earnings season usually marked by when major US banks report results.

This typically coincides with an increase in the number of earnings released, while the unofficial end of the earnings season is usually around the time when Walmart (WMT) announces its earnings report.

3 THINGS TO LOOK FOR IN CORPORATE EARNINGS REPORTS

There are a number of factors to look for in corporate earnings reports. Traders should be more aware of the performance of the largest “bellwether” stocks, understand the significance of an earnings recession in a given stock, and understand how announcing a stock’s earnings might affect a relevant index, depending on the weighting of the given stock.

1) Performance of bellwether shares

When analyzing corporate earnings, it is important to pay attention to “bellwether” stocks that can be seen as an indicator of macroeconomic performance. While the status of a bellwether stock can change over time, larger, more established companies are typically considered shares of bellwether.

Examples of Bellwether shares are:

  • FedEx (FDX): Ships goods for consumers and businesses worldwide
  • Caterpillar (CAT): The world’s largest manufacturer of heavy-duty machinery was seen as a wake-up call given its large exposure to the construction, manufacturing and agricultural industries, particularly in China
  • 3M (MMM): Manufacturing Health Calibre
  • Apple (AAPL): among the largest companies in the world. Important for key suppliers, especially chip manufacturers.

2) Earnings recession

A earnings recession is characterized by two consecutive quarters of year-over-year decline in corporate profits. However, while earnings are a major factor in long-term stock market returns, a earnings recession does not necessarily coincide with an economic downturn.

The chart below shows that in the last six earnings recessions observed in the US, only two had coincided with an economic downturn. The blue circles show where there has been a earnings recession without an economic recession, while the red circles represent where both an economic and earnings recession has occurred.

3) Weighting of earnings and stock index

Traders should understand that when trading gains, some stocks will have a greater impact on the broader index based on their index weighting. For example, when trading the Dow Jones, Boeing releasing its earnings will be very influential on the index, while Visa will probably not be as influential, due to the 9.49% weighting of the former versus the latter’s 4.41%, as shown in the table below. This highlights the importance of paying close attention to the most beautiful stocks and how they can affect a larger stock index.

TRADING DURING THE EARNINGS SEASON: THE BEST TIPS

We have an in-depth guide on how to trade the earnings season, but the important things to remember are:

1) Know the ‘expected’ results

Being aware of what is “expected” regarding revenue/sales and earnings per share (EPS) data is important because a company’s stock price reaction can often be determined by the amount by which they have beaten/lost an aggregate of analysts’ expectations.

2) Beware of surprise ads

Any surprise announcement that coincides with an earnings report can also have an impact on a company’s stock price. These may include share repurchases/share repurchase programs and business guidelines.

3) Be aware of the spill-over effects between stocks

An example of a relapse impact would be if an investor has a chipmaker stock within their portfolio (EG Dialog Semiconductor), Apple’s earnings could have a considerable impact on the stock. As a result, it is important to evaluate correlated stocks, as they can reveal the outlook for a sector, thus triggering a possible sector rotation.

4) Consider volatility relative to the buffer of an expected movement

Processing the “expected move” on a directional basis for a stock in reaction to the binary earnings event can be a difficult effort. Alternatively, a view taken with volatility in mind can instead prepare investors for significant movements without positioning themselves on the wrong side of the final result.

EARNINGS SEASON: KEY POINTS FOR INVESTORS AND STOCK TRADERS

In summary, the earnings season can be an influential factor in a trader’s experience. Be sure to keep up to date on when key earnings are released for individual companies in order to proactively plan. Keep in mind how beautiful stocks, potential earnings recessions, and stock index weights can affect price movements. Keep an eye on what results are expected for each stock, be aware of increased potential volatility for analytical or strategic purposes, and understand how the performance of one stock may affect that of another (or an index as a whole).

Following these key tips can help the trader attempt to get through the earnings season and navigate the period more consistently.

FREQUENTLY ASKED QUESTIONS ABOUT THE EARNINGS SEASON

What does the earnings season tell us about the global economy?

The impact of the earnings season on the global economy depends on a number of factors, from the performance of certain sectors to a variety of fundamental factors. While companies that meet or exceed expectations may reflect a strong business environment, the stock market interacts with the economy in many different ways, so there isn’t always a predictable relationship between the two.

How is the earnings season affected by financial recessions?

Financial downturns can have a significant impact on the earnings season: the dampened demand for products and services caused by a recession or a longer recession can of course mean that earnings fail to meet expectations across multiple sectors. However, perceived defensive stocks such as those of consumer staples or healthcare may better withstand declines or perhaps even become more attractive in such an environment.

Is the earnings season the same date in the US and UK?

When it comes to the us/UK earnings season dates, UK and European companies tend to get most of their earnings about two to three weeks after the US.

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