What is Earning Season? How does it affect Stock Market Prices?

Have you heard of earnings season, also known as earnings season or quarterly financial statement season?

Whether your answer is yes or no, this eToro article will help you better understand what it is. It will also teach you how it works and how you can take advantage of it. This is one of the most volatile times of the year and offers a large number of options for trading the markets. Some people make trading exclusively on these time horizons so narrow, so you can get an idea of the importance of knowing this subject thoroughly.

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What is earnings season?

First of all, it is convenient to know well what this important moment consists of in the calendar of financial market operators. This is the season in which companies publish their balance sheets and quarterly reports, in which important aspects such as earnings per share (EPS), net sales (NP), net income (IN), earnings before interest, taxes, depreciation, and amortization (EBITDA), price-earnings ratios (PER) or dividends per share (DPA) that are so important in the investment strategy. the traders In this way, they obtain a stock market X-ray that provides key information when opening and closing operations with the highest possible chances of success. Company results offer extremely valuable information that you should not ignore when opening and liquidating positions.

You should know that not all regulatory bodies of the securities markets require their presentation to companies that are under their jurisdiction. Thus, for example, in the United States, listed companies are required to submit quarterly reports detailing their data recorded in the quarter that ends. But in others, such as the United Kingdom, its submission is voluntary. The case of Spain stands out, which has recently opted for the abolition of this obligation. Therefore, the earnings season mainly applies to those countries where the submission of these reports is mandatory and is not solely subject to the goodwill of companies.

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How does the earnings season work?

The calendar works like this: companies publish their quarterly reports detailing their financial muscle four times a year. That is, the earnings season repeats once a quarter. It takes place during the weeks before and after the end of the financial quarter. The part before the publication of the quarterly report of results is rather speculative, while the latter part is usually a reflection of the more leisurely fundamental analysis prepared by analysts and operators of financial markets.

Depending on your trading style, you may prefer to trade early or late in the earnings season. Remember that, whatever your preference in this regard,eToro will always be ready for you to trade with all the guarantees at any time of the year.

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How to take advantage of the earnings season?

In many cases, the four earnings reports published annually by companies are the only reliable valuation elements available to investors. The rest of the year, it is normal to hear a bombardment of noise in the media and on social networks that greatly complicates making rational purchase decisions, since emotions end up taking control of even the most veteran operators.

This is not a bad time to remember our responsible investing policy – don’t follow random clues or hunches. Relying on solid data will allow us to make logical and well-informed decisions. Remember that you can find them in the quarterly reports published during the earnings calendar. An income statement means for we are a true compass that we must not miss.

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What is the presentation of results?

Also known under the Anglicism earnings call, this is the key moment in the earnings calendar when the data from the quarterly earnings report are officially published and provided to the regulatory body, such as the CNMV in the case of Spain. It almost always generates great expectations, because it is a true litmus test: it is time to check if the analysts’ predictions before publication agree with the results that have already been officially published. It is not uncommon for violent bullish and bearish pushes to occur due to the discrepancies or concordances observed when the company’s results are officially presented. So this moment may be ideal to launch into trading in the markets.

The presentation of the results reports is usually done either after the close of the trading day or before the start of the session. The objective of this way of presenting the results is to facilitate that the largest possible number of investors can process the data and make the appropriate operational decisions. So you have a small window of time to draw your own conclusions and operate accordingly.

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How to trade during earning seasons?

Knowing how to invest based on business results can bring you many joys as an investor. Not infrequently there has been important market turns after the publication, for example, of weaker or better company results than expected. But in order to be able to take full advantage of the platform that eToro offers you, it is a good idea to know the main indicators to have the best chance of success.

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Important information during the earning seasons

Profit reports provide a wealth of important data to gain insight into the real health of a company. Handling them with ease will allow us to know when it is convenient to enter a company or, on the contrary, when to close positions and raise the anchor. Although all the data published is interesting from an investor’s point of view, there are six that stand out especially and that we present below together with the acronyms with which they appear in the quarterly reports.

1. Earnings per share (EPS)

This indicator represents the amount of net profit that corresponds to each of the shares of a company. Shareholders value it highly because it gives a non-speculative reading of the real value of a stock. It is calculated by dividing the net profit by the number of shares outstanding. Looking at the historical progression of EPS in each report can help us make informed decisions.

2. The price-earnings ratio (PER)

This indicator tells us the current price of a company in relation to its obtained profits. It is published in each quarterly report and is one of the tools most valued by traders, since it allows to know if a value is below or above its real value, thus allowing to open reasonable purchase or sale operations.

3. Net sales (BV)

This indicator represents the sum of the total of all sales made in cash or credit minus all discounts, returns, and rebates. Therefore, it offers us a very faithful approximation to the real financial muscle of a company.

4. Net income (IN)

This indicator represents the result of subtracting gross income minus expenses. It is similar to that of net sales, only in this case we are talking about income and not sales.

5. Dividends per share (DPA)

This indicator reflects the profit obtained by a company divided by the number of shares. It is one of the most valuable data that appears in the quarterly financial statements since it allows us to evaluate the profitability that a given company offers us.

6. Profit before interest, taxes, depreciation, and amortization (EBITDA)

This indicator represents the profit of a company before discounting the interests derived from the debt it has contracted, the amortizations of the investments made, the tax liens inherent to the business, and the depreciation derived from its deterioration.

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Addressing Analyst Profit Predictions

One strategy many stock market traders adopt is to collect a number of predictions made by analysts in the days and weeks before the quarterly reports are released. They look for a consensus between the predictions to try to determine which scenario is most likely to occur.

While it can be a useful strategy, it should not be blindly followed. The reason is that analysts sometimes base their predictions on available historical results but do not have access to problems that can only be known after the publication of a quarterly balance sheet. Therefore, sometimes it is more convenient to follow these analyzes to know the majority market sentiment and wait to see if the expectations are met or not at the time of the official publication of the results. It is in those moments when reacting with speed and cold blood can give us many joys.

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The effect of higher or lower earnings than expected

As we just discussed in the previous section, there is usually a strong reaction to discrepancies between the analysts’ predictions and the data that are finally presented. If the predictions prior to the publication of a quarterly report are more than fulfilled, a bullish movement can be expected. On the contrary, if the published data is worse than expected, a downward movement can be expected. Investors’ emotions of greed and fear also come into play here, so use them to your advantage to gain a competitive advantage.

The news that is published about the companies also contributes to the creation of an expected scenario by the traders. When there is a scenario of optimism or euphoria, good data that is not surprising can trigger an exaggerated bearish reaction and vice versa. So being well informed is key to having the best chance of success at the decisive moment of the quarterly presentation of company financial reports.

In short, quarterly financial statements or reports offer a large number of advantages that we can use to our advantage when operating in the stock markets. On the one hand, they offer us a defined window of opportunity that occurs four times a year. On the other hand, they offer us a period of volatility above normal in which we can operate without all the problems posed by periods of laterality in price action. Finally, they provide us with actual auditable results that we can work with when making our own predictions. It is therefore a great help that no trader who trades stocks should ignore.

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