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Earnings season 101: a comprehensive guide for new investors and traders

Unlock the mysteries of the stock market's earnings season. Whether you're a novice investor or a seasoned trader, discover why earnings reports matter, when they happen, and how to capitalise on this volatile period.

Source: Bloomberg

New to earnings season? Here’s what you should know

Earnings season is an exciting time for stock market beginners! It's when many major public companies announce their financial results from the previous quarter. This article will explain what earnings season is, when it occurs, and why it matters for new investors and traders.

What is earnings season?

Earnings season happens four times per year, after each financial quarter ends. Companies are required to report revenue, profits, and other important financial data from the previous three months.

These quarterly earnings reports help investors and traders understand how well a company performed during the quarter. They contain valuable details like:

  • Revenue – Total sales and income
  • Profits – Also called net income or earnings
  • Earnings per share (EPS) – How much profit is attributable to each share of stock

Strong quarterly results can send a stock price higher, while weak reports can cause the share price to drop. That's why earnings announcements can cause increased volatility and trading opportunities.

When does earnings season happen?

Earnings season typically occurs during the months following the end of a financial quarter:

  • January/February - Reports for Q4 (Oct-Dec)
  • April/May - Reports for Q1 (Jan-Mar)
  • July/August - Reports for Q2 (Apr-Jun)
  • October/November - Reports for Q3 (Jul-Sep)

The unofficial start of earnings season is when big banks like JP Morgan and Citigroup report early in the season. The season winds down when retail giant Walmart releases its report later on.

Why earnings season matters

Earnings season provides insight into the financial health of important stocks and sectors. Here are some key things for new investors to watch:

  • Bellwether stocks – Reports from influential stocks like Apple, FedEx and Caterpillar can indicate the strength of the overall economy
  • Earnings recessions – When profits decline for two straight quarters, it signals companies are struggling. But it doesn't necessarily mean the economy is in recession
  • Index impact – Reports from the largest companies in stock indexes like the S&P 500 or Dow Jones Industrial Average can move their index sharply up or down.

Here are some tips for investors and traders to watch out for when following earnings announcements:

  • Know the consensus estimates – Be aware of what Wall Street analysts are expecting for earnings per share (EPS) and revenue. The stock price will react based on how the actual numbers compare to expectations
  • Listen to the earnings call – Many companies host a conference call after announcing earnings. Listen in to hear management's tone and outlook which can provide insights into the business
  • Note the guidance – Company guidance on expected future financial performance is important. An upbeat or cautious management outlook for next quarter or year can significantly impact the stock
  • Watch for surprises – Earnings announcements can coincide with surprise news like acquisitions, management changes, stock buybacks, or restructuring plans that can also affect the stock price
  • Consider related stocks – A positive or negative earnings report from an industry leader can have a spillover effect on related companies in the same sector
  • Mind the quality – Look beyond just the EPS and revenue numbers. The source and sustainability of profits and sales growth matters too for judging a company's health
  • Remember valuations – Investors often bid up stock prices heading into earnings. Even a positive earnings surprise may not boost a stock if it is already trading at peak valuations
  • Plan ahead – Earnings announcements often lead to volatile price swings. Consider option strategies or stop-losses to manage risk around these events.

Earnings season allows investors to gauge the performance of important stocks and sectors. It's a time of opportunity, but also potential volatility. So, newcomers to stock investing and trading should tread cautiously by using stop-losses and maintaining a well-diversified portfolio.

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