What Is Earnings Season and How Does It Impact the Stock Market?

Daniel Penzing
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If you're an investor, earnings season is key to understanding the companies you invest in.

While having strong earnings is important, the way that a company reports earnings is equally critical. Knowing the difference between reported earnings and actual earnings can help you make better decisions with your portfolio and capitalize on opportunities in the market.

What are Earnings?

Every quarter, public companies report the financial performance for the previous three months. As investors, you want to know company earnings to see how profitable a company has been. Earnings are net income earned by a company over a set period of time. Among the factors that go into earnings are revenue, operating expenses, and interest costs. To calculate a company's earnings per share, divide net income by the company's weighted average shares outstanding.

When companies report earnings, the number doesn't take into account the non-cash expenses that can affect profit. Those include depreciation, depletion, amortization of goodwill, and stock-based compensation.

The Importance of Earnings Season

Earnings season is critical for investors because it helps determine which companies are performing well. When a company reports earnings higher than analysts anticipated, that's called beating earnings expectations. By doing so, a company can attract investors and drive up demand. As the stock price rises, earnings in a company's prospects improve. When a company reports earnings below analysts' expectations, the firm misses earnings expectations. Share prices decrease, and the company's fiscal prospects dim.

What Is Earnings Season?

Earnings season occurs every quarter, when publicly traded companies report their quarterly earnings, and investors and market analysts check to make sure they are meeting Wall Street’s expectations. These three months, from January through March and then again from July through September, are the two busiest times of the year for big investment banks, when analysts and traders put in long hours and stay in close contact with companies, in an attempt to predict how their stocks will react to the earnings reports. During earnings season, the stock market tends to be extremely volatile, and it’s not unusual for the Dow to swing 1,000 points between its high and low during a single day.

Adding to the market’s volatility during earnings season is the fact that, unlike other major financial events, earning season is the culmination of a quarter’s worth of different analysts meeting with different companies, talking to different company executives, digging around for unconfirmed earnings information, and trying to figure out whether or not they’re going to beat the Street’s earnings expectations. All the major Wall Street banks and brokerage firms participate, but they all focus on different companies, resulting in dozens of different estimates for each company’s earnings.

When Is Earnings Season?

The market has rebounded from the recent correction, and we’ve enjoyed a rally in the past month or so. This rebound gave us a chance to pick up stocks that are trading at valuations we like, and the initial indications point to a solid start for the earnings season.

That said, even for those of us who enjoy watching stocks, the current earnings season can be pretty confusing. As a result, we’ve decided to compile a detailed overview of what the earnings season is, what earnings are, and how investors can try to anticipate the market movements during this period.

What Earnings Season Means for Investors

Is a time period of a few months, when most corporations release their reports and give an outlook on their performance next quarter, comparing to last quarter.

What Does it Mean for Investors?

Investors build a strategy for their portfolio during this time and they decide how much shares they should or should not buy.

The stock market is a market of traders, and some of the traders may use these reports to predict the stock market growth. They also set their entry and exit points with these reports.

The reasons, why a trader or investor should use them, are many, but they all come down to analyzing these reports.

What to Look for in a Corporate Earnings Report

The reporting of corporate earnings is one of the most significant dates on the calendar for analysts and traders. The corporate earnings date has a big impact on the stock market.

The popular conception is that corporate earnings directly affect stock prices. However, it is important to look at the economy as a whole and not just earnings reports. It is generally recognized that stock prices are driven by the corporate decisions of two groups: individual small shareholders, and corporate management teams. Collective decisions by these two groups have a big impact on stock prices.

Put another way, the stock price is the capitalization of numerous firms’ fundamentals. The view of analysts and investors is that an earnings report can influence the individual small shareholder’s decision to buy or sell the stock. And an earnings report is a key factor in the corporate management team’s decision to buy or sell their own stock.

Income Statement

An income statement, also referred to as a statement of earnings or an income statement, is a financial statement that summarizes the revenues and expenses of a company over a certain period of time. It shows how profitable an organization is and what a company’s operating performance has been. In other words, you can use an income statement to determine a company’s financial performance.

Balance Sheet

Every public US company with a stock trading on a national US exchange must file its quarterly earnings reports within 45 days of the end of its quarter. Surprisingly, the reports do not include the many off-balance sheet items like leases, pension obligations, and other contingent items.

They report their revenue with their gross margin, a number that reflects the total revenue of a company less the cost of producing the revenue.

Next comes earnings which must be reported with taxes, interest, and depreciation. We consider those the real earnings of a company because they are true bottom line numbers — what the company has after paying expenses.

What Is Earnings Season

Earnings season is the period when companies release their quarterly financial reports to the public. The media and public get their first real insight into the companies’ performance since their last reports. Naturally, the stock market is interested in the news, and they act on it as well.

Statement of Cash Flows

And How Does it Affect The Stock Market?

The income statement and the cash flow statement are the two other types of financial statements that give vital information about a company, apart from the balance sheet. The statements are similar in nature, with the difference being that the cash flow statement focuses on the cash that is being generated and spent by the company while the income statement looks at the profit and loss of a company.

The importance of a well crafted business plan cannot be stressed enough. It outlines what a company does, why they do it, where they want to be in the future, and the steps they need to take to get to that destination.

This includes an appraisal of the financial statements of the company. The aim is to determine if a company is obtaining a return on their investment and if they are making the necessary profit, or making losses. This helps a business know if they need to form a new strategy regarding where they need to go.

They can also adapt their current strategies.

An income statement gives information on the health of the company and enables investors to know if the profits are at an acceptable level. It includes information on revenue, gross profit, operating expenses and net profit, giving information on how much money has been spent by the company on things such as salaries for their employees, supplies and miscellaneous items. It also gives investors an idea of if a company is making a profit or if they are suffering losses.

Notes in the Financial Statement

In accounting, financial statement is a document that details out the assets, liabilities, and capital of a company. The financial statement of a company can be of two types: a basic/abridged financial statement and a full financial statement. The basic/abridged financial statement consists of the statement of assets and liabilities and the statement of revenues and expenses. It is usually prepared annually by a company for government, tax, shareholders, creditors, and other interested parties.

The full financial statement, on the other hand, consists of the basic/abridged financial statements, notes on financial statement, supplemental schedules, and detailed explanations of the accounts included in the basic/abridged financial statements. The detailed financial statement may also include company’s analysis of its performance and outlook as well as an analysis of its financial ratios.

Financial statements are prepared in accordance with the Generally Accepted Accounting Principles (GAAP).The four basic types of accounts are fixed asset account, asset account, liability account, and equity account. The financial statement contains information about the amounts recorded under each heading. The opening balance of a fixed asset account is also called book value or historical cost minus accumulated depreciation.

How to Get Ready for Earnings Season

Earnings season is when a company makes public the information about its performance during the past quarter and provides its forecast for the next period. Earnings season kicks off with the release of the Dow Jones Industrial Average. This is significant because the drop or rise of the market depends greatly on the performance of companies included in the Dow.

During earnings season, a lot is at stake for the companies and for the investors. Investors will observe the future potential of a stock by checking the earnings of a company and will see if it is better or worse than what the market expects. The study of earnings is important for every investor to invest in the right stock. Young investors have to be more careful about investing as they don’t have enough experience to check if a company’s forecast is accurate. This is why an experienced investor will be needed to do a background check of a company.

In general, the stock market will decline in the month preceding earnings season because a lot of investors will hold off on making purchases until they know how a company did the past quarter. During earnings season, you’re sure to see falls in market activity, and this is a good opportunity to buy stocks. This season is also a great chance for companies to release negative news to get rid of it and avoid it from taking down its total stock value.