What is earnings season and how do you trade it?

Companies release quarterly reports during periods known as earnings seasons. As these reports can cause a significant amount of market volatility, we’ve taken a look at what an earnings season is and how you can trade the news.

Apple conference Source: Bloomberg

What is earnings season?

An earnings season is a period during which most public companies release their earnings reports, which detail items such as net income, earnings per share (EPS) and net sales. The reports give market participants an insight into the outlook of a company, and can help them to determine whether they should take a position on the price of the stock.

Quarterly reports are mandatory in the US but not in the UK. However, a large majority of UK companies choose to partake in earnings seasons due to the increasingly multinational nature of many sectors.

Earnings call

An earnings call is a conference between the management of a company, analysts, investors and the media to discuss the outcome of an earnings report. It is a chance for questions to be asked about the main details of the reports.

Depending on when a company holds its earnings call, traders can use the information to inform their decisions. However, not all companies hold earnings calls, and some will not fall within the earnings period.

When is earnings season?

Earnings season usually starts just a couple of weeks after the final month of a financial quarter – December, March, June and September. Earnings seasons therefore fall in January, April, July and October.

For more specific details, you can look at an earnings calendar to find out the exact date of a company’s earnings announcement.

Not all publicly traded companies release their reports during earnings periods, as not all companies' financial quarters are the same. Although it is not uncommon for companies to report outside of earnings seasons, large companies’ releases tend to fall within earnings seasons.

Earnings announcements are released outside of market hours so that the reports reach as many people as possible and don’t interrupt the trading day. This means that reports are either released in the morning before the market opens or in the afternoon after the market closes. Investors and traders then have plenty of time to digest the news and choose how to respond.

To account for earnings seasons, IG provides out-of-hours trading on over 70 major US stocks to help you make the most of the announcements.

How to use earnings reports in your trading

The information that is provided in an earnings report can make a huge difference to market prices, as it can significantly influence sentiment around a company. This means that quarterly earnings reports can actively change the direction of a market, which is why it is so important that traders and investors learn how to use the information correctly.

We’ve compiled a list of five steps that any trader, beginner or professional, should consider when looking at an earnings season:

  1. Choose which companies to focus on
  2. Do your research and look at analysis
  3. Create a trading strategy and stick to it
  4. Open your positions and monitor the market
  5. Learn from each earnings season

1. Choose which companies to focus on

It is impossible to cover every single company that participates in an earnings season, so it is important to refine your list and focus on a few key companies. This could include positions that you already hold, or ones that you have been considering.

Once you know which companies you are going to look at, you should find out the dates that they are going to release their reports on. You can do this by looking at an earnings calendar, which should provide you with the date of the release, an estimated time (although these are not always accurate) and the details of the stock exchange on which the company is listed.

Take a look at IG’s economic calendar for company earnings release dates.

It is also important to list the dates of the leading stocks within the same sector as the companies you have selected, even if you aren’t planning on trading them. The performance of these leading companies, known as bellwethers, can significantly impact the prices of other shares and the industry as a whole.

2. Do your research and look at analysis

Once you have chosen the companies you are going to focus on, it is important to look at estimated earnings figures. The market focus is not necessarily on the announcement itself, but on how close the figures are to analysts’ expectations – if the numbers are above expectations, the market could rise, whereas if the figures are below expectations, it is likely that the market will fall.

It is important to look at a company’s historical figures for predicted and actual earnings. By looking at previous quarterly EPS figures, you can get a rough estimate of how the market responds and what to expect. If a share price experiences significant movement after a report, it suggests that market sentiment is significantly influenced by the announcement. But if the share price shows little reaction to the news, it can be assumed that it is altered by different factors.

For example, Apple shares regularly respond to earnings announcements. If we look at the EPS data from 2017 to 2018, we can see that the actual earnings were largely in line with analysts’ predictions in most quarters.

One of the exceptions is the second quarter (Q2) in 2017. For that quarter, the predicted EPS was $2.02 but the actual figure came in at $2.10–3.9% higher.1 Three days after the announcement, shares of Apple had risen to a then all-time high of $156.65.

Quarter Predicted EPS Actual EPS
Q1 2017 $3.21 $3.36
Q2 2017 $2.02 $2.10
Q3 2017 $1.57 $1.67
Q4 2017 $1.87 $2.08
Q1 2018 $3.86 $3.89
Q2 2018 $2.67 $2.73
Q3 2018 $2.18 $2.34
Q4 2018 $2.78 $2.95

Apple chart

Apple chart

Apple Inc (AAPL) projected EPS vs actual EPS 2017-20181

3. Create a trading strategy and stick to it

It is important to create a strategy for trading any earnings season. This should include a methodology for entering and exiting trades, your profit goals, the time you are going to spend trading and your risk management strategy.

Learn about the top 5 trading strategies.

Company results aren’t always what analysts predict and earnings seasons often lead to ‘earnings surprises’. A surprise can be good or bad, depending on whether a company’s earnings beat or fall below expectations.

Whatever happens, you should always consider your positions in the same way before and after the earnings release. By sticking to your trading strategy, you remove any emotional influences from your trading, so that you can be more logical about your trades. By creating strict rules that you stick to, you will be prepared for any outcome – good or bad – and you will have a set plan of action for what follows.

Risk management is a crucial part of preparing for any earnings season, which should include attaching stop losses and limit orders that will set the parameters for your trade. Stop losses will protect your positions from negative movements, closing your trade at a certain level if the market moves against you. While limit orders will close your trade out once you have reached a certain profit level, locking in profits in case the market turns.

Learn more about risk management tools with IG Academy’s range of online courses.

4. Open your positions and monitor the market

An earnings season can create a wealth of opportunities to open positions, as there is often significant market volatility during such periods. Although periods of volatility may cause concern for investors, they can create opportunities for traders who use derivative products – including CFDs and spread bets – to trade both rising and falling markets.

From your research, you will be able to make a decision about which direction you think the market will go in after the earnings announcement and open your trade accordingly. If you think a company’s shares are going to rise, you would ‘buy’ or ‘go long’ on the shares, and if you think the shares will fall in price, you would ‘sell’ or ‘go short’ on the shares.

Learn more about how to short a stock.

Once your position is on the market, it is important to keep up to date with any information that could cause the market to move – including the earnings of other stocks, the performance of stock market indices and the outcome of earnings calls.

You can get updates from our in-house experts with our news and trade ideas section.

5. Learn from each earnings season

Once you have closed any positions that you opened during an earnings season, it is important to review your results. You should always perform a post-trade analysis, whatever the outcome of your trade was.

A successful trading strategy is not plucked from thin air, it takes time to cultivate the best one for you and your earnings-season goals. This means that learning from each trade is crucial to better preparing you for the next earnings period.

Conclusion

If you decide to trade an earnings season, there are a few key points to remember:

  • An earnings season is the period in which public companies release their quarterly earnings reports
  • Earnings seasons can create volatility as the market adjusts to new information
  • Earnings seasons occur after the final month of a financial quarter: in January, April, July and October
  • You can use an earnings calendar to find out the dates of company earnings announcements
  • Earnings announcements are made outside of market hours
  • You should focus on a select few stocks for an earnings season
  • You should look at historical data for company performance and analysts’ expectations
  • You should create an earnings-season trading strategy and stick to it
  • You can trade markets that are rising and falling with CFDs and spread bets
  • You should always perform post-trade analysis to learn from each earnings season and prepare for the next

It is equally important to remember that you do not need to trade earnings season at all. Some traders might find that earnings season is not for them, while others might choose to close any existing positions to avoid the period of volatility all together. Your choice about whether to trade should match your trading goals and risk appetite.

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