The stock market has several calendars that give it a particular rhythm as information is released to the public over time. This means that certain periods during the year tend to exhibit higher price volatility for individual stocks and the market as a whole. One of the most important time frames for stocks is commonly known as earnings season, which occurs on a quarterly basis when most corporate earnings reports are released to the public.
Earnings season can have a considerable impact on both individual stocks and the general market as companies report earnings that are then compared with the average of analysts’ expectations. Rapid price shifts happen when released earnings results differ substantially from expected results. Keep reading to find out more about how earnings season affects individual stocks and the stock market.
What is Earnings Season?
Earnings season consists of the period in each quarter when many publicly traded companies report their quarterly earnings to stockholders, market analysts and the general public. Most companies compile a quarterly report that is distributed to shareholders where they release their corporate earnings. Such reports also typically include any other significant company news that may have occurred during the past quarter as well as earnings guidance for the coming quarter and year.
When a company announces its quarterly earnings, it generally holds a meeting or conference call where the company’s chief executive officer and other company officials reveal the company’s earning progress — or lack thereof — during the previous quarter.
Large corporations generally schedule and announce earnings meetings or conference calls in advance. Their chief officers then reveal the earnings information to stockholders and the general public at the appointed moment. Such releases can notably move the market price of a company if they differ significantly from market expectations.
When is Earnings Season?
Earnings season in the U.S. stock market generally starts 1 to 2 weeks after the end of the previous fiscal quarter and lasts for approximately 4 to 6 weeks. While many companies report their earnings soon after the end of the quarter, some companies release their quarterly earnings report as much as 1 to 2 months after the quarter’s end.
Public companies typically release their earnings at the beginning to the middle of January, April, July and October. While most companies report earnings on a normal quarterly calendar, the exact timing of earnings releases depends on each company’s fiscal year, so release dates can vary.
Many companies host an earnings conference call that consists of a public conference where company officers present earnings to market analysts, stockholders and the general public. A company’s earnings conference call will generally coincide with the release of its financial results in the form of a 10-Q report that is filed with the Securities and Exchange Commission (SEC) every quarter. These 10-Q reports are typically included with the company’s earnings press release and can also be obtained from the SEC’s EDGAR database.
Traders and investors have traditionally noted the unofficial start of earnings season with the release of Alcoa Corp.’s (NYSE: AA) earnings. Alcoa is the world’s 8th-largest producer of aluminum and has consistently released its earnings in the 2nd week after the end of each quarter for decades.
While no longer a Dow Jones Industrial Average 30 stock, Alcoa continues to be a bellwether indicator for U.S. economic growth because its products are used by several different market segments. These include the automotive, construction, energy and consumer electronics industries.
How Does Earnings Season Affect Investors?
In addition to containing detailed information on a company’s earnings, quarterly earnings releases contain key financial and performance metrics that could directly impact the company’s profitability and stock price. Earnings reports also include various tables, figures and charts that explain how the company’s financial results have been determined.
Important information to examine when evaluating an earnings report include:
- The balance sheet: The balance sheet shows the financial health of the company at a specific time and gives you an idea of what the company owns, its debts and whether it can operate smoothly on its income. The balance sheet displays a company’s total assets, including cash, accounts receivable, inventories and property; its total liabilities, including the company’s loans, accounts payable, bonds and other debts; and its shareholder equity, company’s assets minus liabilities.
- The income statement: The income statement summarizes what the company earned and how much it spent during the quarter. Income consists of a company’s revenue (how much it earned from sales during the reporting period) and its net income (how much money the company made after expenses in that period).
- The statement of cash flow: This statement shows how much money was received and how much money was paid out by the company during the quarter. While less important than the balance sheet and income statement, the cash flow statement provides useful information about where the company’s money comes from and how it’s being spent.
A company’s financial statement may also have notes on items pertinent to its quarterly earnings. The notes could include important information about the company’s debts, expenses, income and key risks, such as lawsuits, foreign exchange and other market risks. You can search the company’s 10-Q form online at the SEC’s website and search for “risk,” “inadequate equity” and “pending lawsuits” for more information on unusual exposures it might have.
While long-term investors may not be affected much by short-term price fluctuations caused by earnings releases, active short-term traders and investors often look at earnings releases as opportunities to establish new positions in the company’s stock or liquidate existing ones.
For example, if a company reports significantly higher-than-expected earnings, then its stock price tends to go up. Conversely, missing analysts’ expectations by reporting lower-than-expected earnings can have a negative effect on the company’s stock price.
Keep in mind that even if a company reports excellent earnings that exceed analysts’ expectations, its stock price might still decline if the price has risen considerably in the days leading up to the announcement. A similar thing can happen if a company is rumored to announce lower-than-expected earnings that causes its stock price to soften ahead of the earnings release date.
Such counterintuitive movements occur more often than you might expect and are typically thought to arise from traders taking positions ahead of a release based on rumors and then taking profits upon the actual release. A famous market adage even advises traders to “buy the rumor, sell the fact.”
Basically, an expectation based on credible rumors of an earnings report that is substantially better or worse than that projected by market analysts may be discounted into the stock’s price before the actual release. If earnings then come out in line with those rumor-based expectations, the stock will often retrace some of its gains or losses that preceded the announcement due to profit-taking as traders square their speculative positions.
Benzinga’s Favorite Investment Calendars
Benzinga offers one of the most complete sets of financial calendars covering the release dates and times of various types of financial information. In addition to an earnings calendar, you can also access an analysts’ rating calendar, a conference call calendar and an investor guidance calendar, among others.
Earnings season represents a notable opportunity for active traders and investors to take advantage of increased stock price volatility as numerous companies release their earnings reports.
The average and range of stock market analysts’ estimates also offer a guideline for what to expect in a company’s quarterly earnings report before it is released. Any deviation, whether above or below the analyst consensus for quarterly earnings, will generally spark volatility in the company stock’s price that can provide short-term trading opportunities.
Long-term investors may not be significantly affected by quarterly earnings reports, although they can use earnings reports to discern longer-term patterns in a company’s earning and spending behavior. Earnings reports can also motivate such investors to accumulate more stock if the release is favorable or to liquidate their position if the release is disappointing.
Frequently Asked Questions
Why do they call it earnings season?
The term earnings season is used among stock market professionals because many publicly traded companies announce their earnings results during this period, which generally starts 2 weeks after the end of each quarter and runs for 4 to 6 weeks thereafter.
How do earnings affect stock prices?
Earnings represent a company’s bottom line. If a company shows a pattern of consistently higher earnings, the price of its stock tends to increase because it looks like a solid investment. Conversely, if a company’s earnings decline or it shows a loss, then the company’s stock price is more likely to decline because it becomes a riskier investment.