Earnings Talking Points
- What is Earnings Season?
- Why is it Important to Look at Company Earnings?
- Bellwether Stocks
- Earnings Recession
- Top 10 stocks Across US and Europe
Earnings season is a period within the year, usually lasting several weeks, where the majority of listed companies announce their latest financial accounts. An earnings report consists of revenues, net income, earnings per share (EPS) and forward outlook, which provides investors with insight in regard to the current health and outlook for the company. As such, this help market participants trade the company they are monitoring and the broader index, depending the impact the company has i.e. strong Apple (AAPL) earnings report may see investors buy Nasdaq 100 futures.
When is Earning Season?
Earning season takes place a few weeks after each quarter ends (December, March, June, September). In other words, earnings seasons begins around January-February (Q4 results), April-May (Q1 results), July-August (Q2 results) and October-November (Q3 results), with the unofficial start of earning season confirmed when the major US banks report. This typically coincides with an increase in the number of earnings being released, while the unofficial end of earning season is roughly around the time that Walmart (WMT) announce their earnings report.
Why is it Important to Look at Company Earnings?
Corporate earnings are among the most important fundamental drivers of individual stocks and by extension the broader stock market over the long run. Additionally, in the short term, there is not an awful lot that impacts stocks and provides the possibility of large price swings than earnings.
While for the broader index, if the majority of companies within an index, particularly those that a market leader, are reporting earnings that are better than expected, investors typically have a more positive/bullish outlook with regard to not only the individual stocks but also the index. While on the flipside, corporate earnings that underperform expectations would see investors grow more cautious/bearish over the stock market outlook than they otherwise would have been. Consequently, given the importance over earning season, volatility tends to be more elevated around this period.
What to Look out for
Bellwether Stocks Key to Economic Outlook
When analyzing company earnings, it is important to look out for “bellwether” stocks which can be used as a gauge for the performance of the macro-economy. While the status of a bellwether stock can change overtime, the largest and most well-established companies are typically considered a bellwether stock.
Examples of Bellwether stocks
- FedEx (FDX): Ships goods for consumers and businesses across the globe.
- Caterpillar (CAT): World’s largest heavy-duty maker has been viewed as a bellwether given its large exposure to construction, manufacturing and agricultural industries, particularly in China.
- 3M (MMM): Gauge for the health of the manufacturing sector.
- Apple (AAPL): Among the world’s largest company. Important for key suppliers, in particular, chipmakers.
An “earnings recession” is characterized as two consecutive quarters of y/y declines in company profits. However, while earnings are an important factor in stock market returns over the long term, an earnings recession does not necessarily coincide with an economic recession. The chart below shows that in the past six earnings recessions witnessed in the US, only two had coincided with an economic recession.
Source: Thomson Reuters, DailyFX. Red circles = earnings & economic recession. Blue Circles = earnings recession without economic recession.
Earnings Impact on Risk Sentiment Depends on Index Weighting
DJIA (Dow Jones Industrial Average) | Day Trading the Dow Jones: Strategies, Tips & Trading Signals
Nasdaq 100 | Nasdaq Trading Basics: How to Trade Nasdaq 100
EARNING SEASON TIPS
- When analyzing company earnings, it is important to know what is “expected” with regard to the revenue/sales and earnings per share (EPS) figures, given that a company’s share price reaction can be determined by size in which they beat/miss expectations.
- Surprise announcements that coincide with earnings report can also impact the share price of a company, which include stock buybacks/share repurchase programs as well as company guidance.
- Spillover effects can be important for an investor. For example, if an investor has a chipmaker stock within their portfolio (i.e. Dialog Semiconductor), earnings from Apple could have a sizeable impact on the stock. Consequently, it is important to assess related stocks, given that they may reveal the outlook for a sector, thus sparking a possible sector rotation.
- Working out the “expected move” for a stock in reaction to the binary event, can be utilized through option straddles. Going long a straddle means that a trader would buy a call and put option for the same underlying stock with same strike price and expiration date. Therefore, if the stock makes a sizeable move in either direction before the expiration date a trader can realize gains. However, beware that the initial investment can be lost if the share is flat, while options whose expiration is after the earnings announcement are typically move expensive.
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Whether you are a new or experienced trader, we have several resources available to help you; indicator for tracking trader sentiment, quarterly trading forecasts, analytical and educational webinars held daily, trading guides to help you improve trading performance, and one specifically for those who are new to forex.
--- Written by Justin McQueen, Market Analyst
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