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Expectations for earnings season
Profit growth in the last earnings season was 9.6%, but top-line revenue growth was only 1.1%. This shows that companies are continuing to maintain margins in order to protect profits. However, the important question is whether the earnings reports will help boost the current market rally. Emerging market troubles have disappeared, and while the Federal Reserve’s stance appears to be slightly more hawkish than previously thought, it is not about to raise rates immediately.
US data has undergone something of a slowdown of late, hurt by difficult weather, and this has made the going difficult for equity indices. However, consumer confidence is rising in the country, and this should prove to be a useful support for corporate earnings since confident consumers tend to spend more.
Earnings season strategies
When trading during earnings season it is important to consider whether you are planning on a short-term trade or if a long-term position is preferable. The immediate period around an earnings release can be volatile, particularly if the company either significantly beats or misses expectations. Much like markets around non-farm payrolls, the first reaction can be severe but then rapidly reverse. For short-term trades, the general rule of thumb would be to reduce position sizes and widen stops in order to avoid getting caught out by a sudden move.
If you are looking at a longer-term trade, it may well be sensible to avoid placing the trade near to an earnings release, preferring instead to wait until the noise dies away and first reactions are completed. In, for example, a strong uptrend, a weaker earnings release could cause some to close out their positions due to fear that a reversal is underway. If the stock begins to recover in the following days, this could indicate a resumption of a long-term uptrend.
IG will be keeping an eye on all the main earnings reports this season, and as usual our Twitter feeds will aim to update on particularly important announcements. The season begins in earnest on 8 April, when aluminium company Alcoa takes its traditional turn as the first major company to report.
The month of March has seen plenty of newcomers to stock markets on both sides of the Atlantic. Poundland, Pets at Home, Boohoo.com and now King have all made their debut. Not all went as planned, with King in particular quickly dropping below its listing price of $22.50. The big one, Alibaba, is still to come, but the flow of new entrants does suggest that there is still an appetite for equities among investors.
As with all trades, it pays to be selective with IPOs, and investors should try to avoid being carried along by hype. An IPO is a sale of shares, and investors should ask, ‘why should I buy what they’re trying to sell?’ If the company seems overvalued, it can be prudent to stay away. Once the froth has died down, cooler analysis can take over.