The phrase “earnings season” refers to those special times of the year where a big number of publicly listed companies reveal their quarterly and/or annual financial results.
There are four earnings seasons in a year, each lasting about a month and kicking off in mid-January (after the end of the fourth quarter in December), mid-April (after the end of the first quarter ends in March), mid-July (after the end of the second quarter in June), and mid-October (after the end of the third quarter in September).
Companies generally release their earnings reports when the stock market is closed in order to give market participants sufficient time to analyze them. Analysts use companies’ outlooks and other forecasting models to estimate the earnings-per-share (EPS) and revenues that are likely to be reported.
How Earnings Season Helps Traders
Earnings season, without doubt, offers the greatest stock trading opportunities for investors. More often than not, the reports move markets. If a company announces unexpected quarterly earnings, the stock may move up or down dramatically.
Stock prices move based on the expectations of market participants. The market may not see a 15% rise in quarterly profit as positive if it was expecting a jump of 20%. In the same way, a 20% decline in earnings may push a stock up if analysts anticipated a much higher decrease.
During earnings seasons, day traders get a lot of tradeable information that moves the stock market. And because new information affects most price-swings in the markets, the traders can be able to make great returns by buying and selling the right stocks.
Traders love to scan the market for stocks with the highest short interest that are about to announce earnings. These type of plays can present great trading opportunities for traders, because if the companies post strong earnings and lift their outlooks, the chances for a big short-squeeze rises significantly.
Market participants judge companies by their ability to surpass analysts’ consensus estimates. Knowing the significance of those forecasts helps traders manage through quarterly financial results. Earnings and revenue growth are vital drivers of the perceptions of stock prices and traders in general.
Many investors look forward to the periods in which a large number of companies issue their earnings announcements. These alert traders to understand and know what to look for in the stock market. For traders it is important to focus on the overall trends in the revenue growth announced during earnings the season as well as earnings per share growth.
Time is key as it always has been the case in the world of stock trading. However, traders have a better chance of enjoying short-term benefits if they have good fundamentals to help support their trading decisions during the earnings season.
Stock traders should not just take earnings report announcements on face value. They ought to take into consideration other influences to the perceived value of a share, including the three main analyses of sentiment, technical and fundamental analyses.
During the earnings season, some industries or companies tend to come out as leaders. For example, International Business Machines and General Motors have been the leading companies in the U.S. stock market during the last century. As such, the stock market would shake if either of the two companies get halted or fail to perform as expected.
Earnings season is also about perception and perspective. Day traders and many other market participants perceive the seasons in different ways and have their own confirmation biases to some degree. Investors ought to consider the longer, medium and short term effects of a quarterly financial report.
There is no substitute for trading success like analysis and research. However, when investors come across opportunities during an earnings season that are obviously negative or positive, they certainly have a much easier choice to make. If a season is able to offer traders more careful consideration to both long and short term implications, they can be at a better position to make more profitable trades.