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What Are Earnings and How to Trade During Earnings Season?

Plus500 | Sunday 24 September 2023

Earnings Season is a term every trader, investor, analyst, and even the average consumer should be familiar with. This is because earnings can provide valuable insight into both the state of the stock market and the global economy, hence causing market volatility and affecting trading and monetary policies

But what is Earnings Season exactly, what do earnings reports reveal, and how can traders and investors trade during Earnings Season? Here’s what you need to know:

An image of financial and earnings data

What Is Earnings Season?

Earnings Season is an unofficial timeframe during which many publicly traded companies release their quarterly earnings reports at the end of each fiscal quarter and it lasts several weeks. 

What Are Earnings Reports?

An earnings report is a financial disclosure released by publicly traded companies, offering detailed information on their financial performance over a specified period (usually on a quarterly basis).

What Do Earnings Reports Measure?

Earnings reports include updates on a company’s revenue, profit margins, net income, expenses, earnings per share (EPS), and guidance among other measurements. 

Here’s what some of the main segments included in earnings reports mean:

  • Revenue: The overall financial inflow resulting from a company's operational activities, quantified over a specific duration of time.

  • Expenses: The expenditures that the company faces to sustain its operations, encompassing operating expenses, cost of goods sold, and other miscellaneous costs.

  • Profit Margins: The proportion of revenue that translates into profit once all the business-related expenses have been subtracted.

  • Earnings Per Share (EPS): The profit a company has generated per outstanding share of its common stock. You can read more about EPS in our “Earnings Per Share (EPS)" article.

  • Guidance: The company's publicly disclosed forecasts and projections for its earnings in the current quarter and future periods.

  • Net Income: The company's ultimate profitability once all expenses and costs have been subtracted from its total revenue.

When Do Earnings Reports Get Published?

Most publicly traded companies follow the standard calendar, with the ends of their financial quarters coming at the end of March, June, September, and December. Approximately one week to ten days later, the companies release their reports.

What to Consider During Earnings Season

Earnings Season can act as a double-edged sword. While Earnings Season can have the potential to shift the trend of an entire sector, sometimes it can have little effect on the company’s shares. For example, even if an entire sector dips during Earnings Season, that does not necessarily mean that the shares of a company you are following will dip. Nonetheless, there are a few aspects you can take into consideration when trading during Earnings Season.

Companies’ News and Recent Updates

Before deciding to trade on a particular share, traders may review recent news surrounding the company. Was there a recent press release during the quarter? Were there any upticks in positive reporting? Did the company have any scandals that may affect its reputation?

These can all give some ideas on what the upcoming report may say and you can keep track of some of the major market news when trading during Earnings Season through Plus500’s free News & Market Insights articles.

Historical data

Looking at a share's price movements from the previous year, half, and quarter may give insight into how traders will react to whatever the upcoming earnings report says. If a year before, a company’s earnings report showed growth but its price dipped anyway, you can attempt to find the reasoning behind this. If a company’s revenue decreased but its share prices rose, you can find out why traders felt optimistic.

Past performance is not indicative of future performance. Yet, it is still something that you can take into consideration.

Expect the unexpected

While the aforementioned factors can be taken into consideration during Earnings Season, you should still expect the unexpected when it comes to the market as it is known for its volatility. 

Sometimes, share prices rise and fall without a clear underlying reason, and here are some historical and more recent examples of this:

  • Zoom in 2020

In Q3 of 2020, Zoom (ZM) reported revenue of $777.2 million, while only $693.4 million was expected. In addition, their earnings per share came in at $0.99 versus the predicted $0.75. Yet, despite these seemingly optimistic numbers, the share price dropped 22.5% from $486.90 the day of the announcement to $377.20 two weeks later on December 14th. 

While the exact reason for this is unclear, it may be that traders worried about Zoom hitting its peak with Coronavirus vaccines around the corner, and with more in-person interactions, there would potentially have been less demand for video conferencing.

  • Under Armour in 2021

American sports equipment manufacturer Under Armour (UAA)’s stock also started falling after reporting good 4Q21 earnings on February 11, 2021.  Although the company's earnings for the fiscal year which ended on December 31, 2021, were positive due to higher demand for athletic apparel and footwear, the rise in supply-chain costs put pressure on its profitability. Thus, despite the company’s positive earnings, Under Armour’s shares took a gloomy turn as they fell by almost 10%, hence reaching $18 per share. The future of the sports apparel maker is still unclear with factors like inflation and supply-chain issues still unknown. 

  • Microsoft in 2023

On July 25, 2023, big tech giant, Microsoft’s (MSFT) stock price fell almost 4% in extended trading on that day despite having exceeded analysts’ expectations in earnings per share and revenues. 

The fall came as a result of Microsoft reporting weaker guidance that may have deterred some analysts and investors that day. In addition, the earnings report showed that despite the tech behemoth’s efforts and AI investments, the company’s cloud computing department was weakening. (Source:CNBC)

Why Are Earnings Reports Important to Traders and Investors?

Earnings reports are important to traders, investors, as well as analysts as they can provide valuable information about companies and how they have fared in the quarters in question. Here are some of the reasons why Earnings Season should interest market participants:

  • They reflect a company’s health: one of the main reasons earnings are considered important is the fact that they reflect a company’s financial health. In other words, they show how well or badly a company has performed. This may be especially interesting for traders and investors who may want to benefit from a company’s stock price swings. This also means that earnings can have a direct effect on investors' and traders’ decisions, which would, in turn, affect the company’s stock performance. 

  • It affects stakeholders’ net income: since companies’ dividends are distributed to shareholders in accordance with the company's net income if a company reports below-average earnings, then it can affect stakeholders’ profits and equity as well. 

  • It can lead to market volatility: earnings reports can send ripples across the markets and cause volatility which, in turn, can affect both the stock market and the economy. 

  • It can affect market analysis: earnings serve as important data points for analysts as they can use it to assess a company’s performance in the past and future. 

What Are Earnings Calls?

During Earnings Season, publicly traded companies host conferences whereby the public (investors, traders, and analysts) can join in and listen to the companies' financial data and statements. These conferences are called “Earnings Calls.”

Trading During Earnings Season

For those interested in trading during Earnings Season, here are some basic aspects that should be kept in mind:

Choosing Companies

The first step to developing a trading strategy during Earnings Season is narrowing down the number or range of potential companies to research. This search can begin by reviewing companies within a particular sector of interest, based on which companies have caught your attention while trading between Earnings Seasons.

Checking the news regularly before the beginning of the Earnings Season will help traders keep up-to-date on global politics, acquisitions, and potential IPOs. If a trader begins reading headlines in January in preparation for April earnings, they will have better insight into various market factors that may potentially be difficult to digest with only a week to go before Earnings Season. In addition, traders may also want to keep track of any upcoming events that can potentially affect earnings. As such, they can refer to Plus500’s free economic calendar feature to see some of the main events that can potentially shift the markets.

Researching

Once you have chosen companies whose shares you wish to trade, you may want to ask yourself, what are their key sources of revenue? Is their most popular revenue source also the most profitable? 

For example, Disney (DIS) is well known for its parks and theatrical releases, yet in 2020 it was Disney+, their online TV and movie streaming service, that surpassed expectations with 73 million paying subscribers. While people may have not thought of streaming when thinking of Disney, it has proven to be a vital revenue stream due to higher subscriptions and views brought about by the COVID-19 lockdowns. 

In 2021, Disney+ surpassed that subscription rate by reaching about 118 million subscribers. However, despite that ostensible increase in subscription, the company reported disappointing Q4 earnings for 2021 with people slowly going back to their normal lives in response to COVID restrictions getting lifted. Accordingly, this turnaround only highlights the fact that share prices can be volatile and unpredictable despite their earnings in the past.

Moreover, it may also be worth keeping track of analyst expectations to predictions of a company’s possible price trajectory. Whether you agree or disagree with the forecast, it may impact the company positively if it exceeds the expectations or negatively if it falls short, regardless of its actual earnings. 

For example, a trader may speculate that a company’s revenue stream presents an opportunity for the share price to rise, so they may open a ‘Buy’ position, to benefit from a potential uptrend. On the other hand, they may speculate that this revenue stream is not sufficient and the buzz around the shares will soon fade. This may lead them to open a ‘Sell’ position which will allow them to potentially benefit from a falling share price. This is important as both of these positions can have inherent risk, should a position move in a direction that is not favorable to the trader.

Strategizing

Once you have done your research, you can pick a strategy and stick to it. When entering a trade that clearly moves in your direction, it is easy to ride it until you see a clear indicator to sell, but this rarely happens. Following earnings releases, share prices have the potential to move higher and lower throughout the day. During these volatile periods, it may be difficult to take a step back and see the big picture.

Accordingly, you may want to consider when you want to enter and when you want to exit. Which numbers are you looking for and what is your ceiling? Consider how much risk you are willing to take on and what the full strategy will be, all before entering a trade.

Conclusion

Regardless of how or what you trade, Earnings Season holds the potential for market volatility, and trading share CFDs with Plus500 can allow you to potentially benefit from stocks during this substantial time. Plus500’s free and helpful tools, such as News & Market Insights, indicators, risk management, and +Insights data, as well as the free Trading Academy materials can help you make clearer choices both before opening trades and while they are active.


This information is written by Plus500 Ltd. The information is provided for general purposes only, and does not take into account any personal circumstances or objectives. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. No representation or warranty is given as to the accuracy or completeness of this information. It does not constitute financial, investment or other advice on which you can rely. Any references to past performance, historical returns, future projections, and statistical forecasts are no guarantee of future returns or future performance. Plus500 will not be held responsible for any use that may be made of this information and for any consequences that may result from such use. Hence, any person acting based on this information does so at their own discretion. The information has not been prepared in accordance with legal requirements designed to promote the independence of investment research.

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