Insider Tips for Maximizing Earnings Season Trading
About earnings season
Earnings season is a period when most publicly traded companies announce their quarterly results. It usually starts two weeks after a quarter ends (the third week of January, April, July, and October) and lasts about six weeks.
While public companies can designate the start and end of their fiscal year, they must file four quarterly reports. However, most firms announce their quarterly results during the earnings season, which marks a period of heightened market volatility and anticipates changes in stock prices.
Both investors and analysts anticipate the data and crunch the numbers to formulate the financial trends and individual business performance, delivering a more accurate picture of the market's state.
The effects of quarterly earnings
Wall Street analysts follow individual companies throughout the year, not just during the earnings season, giving forecasts about future earnings and sales. Therefore, informed investors already anticipate specific results from the quarterly reports.
When the earnings season starts and the reports roll out, several outcomes can come out from the clash between the analysts' forecasts and delivered financials:
- Bearish (Bad): If the company does not meet estimates or predictions from the analysts and reports a drop in sales or profits, it can cause a severe drop in stock price.
- Positive: A mildly positive indicator is the company beating the forecast on sales, which has the potential to boost the stock price.
- Better (Bullish): If the company surpasses its profit estimates, it is a significant boon to its outlook and will likely result in a stock price hike.
- Stellar (Best): When the company beats analysts' estimates on sales and profits and further increases its guidance, it virtually guarantees a stock price hike.
Although fundamentals play a dominant role in this assessment, it should be noted that psychological factors also have a considerable effect on stock price. Therefore, it is not uncommon to see investors rewarding companies that report less negative (but still negative) reports and punish companies that improved their reports, but less than the degree the investing public had anticipated.
How do you trade stocks during earnings season?
With all this in mind, let's delve deeper into how you can trade earnings season for your benefit.
- Keep track of the Wall Street expectations before the season begins
- Prepare for surprises
- Do not forget about the fundamentals
- Long-term strategy is better than seasonal activity
Earnings seasons are investing festivals when the magic happens: stock prices turn, twist, and change, for better or worse, to reflect individual companies' performance. The rise in stock price volatility presents great opportunities, risks, and emotional pressure, requiring a prepared and trained investing mindset.
With the tips mentioned in this article, you should be that much more ready to cope with everything and get through the season in a better position than you started with.
This article was prepared using information from open sources in accordance with the principles of Ethical Policy. The editorial team is not responsible for absolute accuracy, as it relies on data from the sources referenced.