If you want to take your trading skills to the next level, you need to embrace earnings season. The financial fortunes of a company can and will change over time. As an investor, you need to be aware of these fluctuations and, in turn, understand what they mean for your holdings.
Trading is all about information and timing. If you can use the right data to make investments at the right time, there’s every chance you could make a profit. Here at eToro, we’re always giving updates and insights. Using our social trading feature, daily reports, and learning hub, you can get almost all of the information you need to start trading.
Earnings season is the term used to describe the periods when publicly listed companies release their quarterly reports.
However, you don’t want to be shooting in the dark. In other words, you need to know how to trade earnings season. For that, you need to answer two questions: “when is earnings season?” and “what information should I be looking for?” This guide will answer these questions and more.
What Are Business Results and Why Are They Important?
You need to understand how profitable a company is before you invest and, just as importantly, after you’ve invested. If a company is making money every quarter, it’s probably going to be a solid investment. If, however, it’s losing money, it may not be.
Naturally, there are no hard and fast rules because there will be multiple reasons why a company’s earnings report is positive or negative. However, even with that being the case, financial updates are important markers for the industry in general, as well as your own trading activity.
What Are Earnings Reports?
An earnings report is a public document that shows a company’s profit/loss. The accounting process for major companies can be quite complex. However, when you’re reading quarterly reports, the main thing you’re trying to ascertain is whether or not the company is profitable. In other words, when taking all the revenue and minus all the costs, what’s left?
If there’s a surplus, the company made a profit. If not, it made a quarterly loss. From this, you can decide whether the company’s shares are worth investing in or, indeed, whether you should sell your shares.
As much as quarterly results reports are a tool for investors, they’re also a legal requirement. Public companies must meet different requirements in different countries. In the US, the Securities and Exchange Commission (SEC) requires companies to report earnings every quarter. Therefore, if you’ve invested in a US-listed company, you know there will be four earnings seasons every year.
Earnings season is the term used to describe the periods when publicly listed companies release their quarterly reports.
Quarterly Business Results Explained
When is earnings season and when do quarterly reports get published? The first thing to note is that earnings season doesn’t necessarily follow the annual calendar. Instead, companies follow the economic calendar, which means reporting periods are individual.
In general, each earnings season starts a week or so after the final month of the previous quarter. Quarters are three-month periods which, according to the US economic calendar, are:
- January, February, and March = Q1
- April, May, and June = Q2
- July, August, and September = Q3
- October, November, and December = Q4
So, based on the above, when do companies report earnings? The majority of US companies will publish earnings reports after the final month of each quarter. That means you can expect earnings season to take place during the following months:
- Early-to-mid January
- Early-to-mid April
- Early-to-mid July
- Early-to-mid October
The unofficial start to earnings season in the US is when Alcoa, an aluminium producer, releases its financial report. From there, other companies follow suit. Because each one has its own accounting periods and terms, there are no set dates. Earnings season in the US ends once all publicly trading companies have released their quarterly reports.
How to Use an Earnings Calendar
Our economic calendar features key dates for when earnings reports will be released. We also publish daily updates that pinpoint important moments from the day’s trading and, in turn, when significant events are set to take place. This could be something such as a scheduled earnings call, SEC announcements, US federal (or any local government) statements or anything else that could impact the price of stocks.
The eToro economic calendar orders companies by their market cap and outlines their financial instrument, sector, and expected reporting date. Our data is taken from Xignite and covers a 45-day period prior to earnings reports being released. Therefore, you can use the calendar on a monthly basis to plan when you’re going to review your holdings.
TIP: Use eToro’s Earnings Calendar to keep up to date with the latest quarterly filings and scheduled reports.
What is An Earnings Call?
A publicly-traded company will often follow its year-to-date earnings report with a call. This call is similar to a press conference in the sense that information will be presented to the public and, in turn, given some context.
Earnings season doesn’t necessarily follow the annual calendar. Instead, companies follow the economic calendar, which means reporting periods are individual.
Earnings calls aren’t mandatory, but they are common. They usually feature a presentation from the company’s CEO, during which they recap the latest quarterly report and offer some reaction. Analysts and members of the media are then able to ask questions and make comments.
Although members of the public can’t contribute to an earnings call, you can watch them. Whether it’s in real-time or a recording, you’ll get an insight into a company’s financial health. Moreover, it’s a chance to create a fundamental analysis and understand a company’s future prospects.
Expectations During Earnings Season
As a trader, it’s important to have an answer to the question “when is earnings season?” However, it’s not enough to simply remember a list of dates. You have to know what to expect and what you can get out of it.
One thing that many novice investors get wrong when they’re thinking about a company’s year to date earnings is reality vs. expectation. The value of a company’s shares, particularly in the lead up to an earnings report, is based on expectation.
Although the amount of money a company makes is important, the most crucial factor in determining value is how close earnings were to expectations.
If company X was expected to make 10% more profit, but its earnings report showed a 1% increase, that’s a negative. Even though the company made money, it was below expectations. Therefore, when you’re looking at key earnings reports this week, it’s important to think about what’s expected of a company.
There are various earnings plays you can make during the reporting season. However, whatever plays you make, they should be grounded in facts, data, and opinion. With that in mind, the three points below should help you analyze the markets before, during, and after earnings season:
- Use your own knowledge of the market. Conduct your own research and consider what you know about a company, its history, recent performance, expected earnings, and general market conditions.
- Use the information produced by each company you’re tracking. As well as the actual earnings data, review the company guidance. What do company executives expect to happen in the coming months? Moreover, how do these expectations compare to your own analysis and that of investment banks/analysts?
- Use the information produced by analyst forecasts. These are fundamental during earnings season because they often influence share prices. Again, price fluctuations are often based on expectation. Therefore, if analysts are bullish in the lead up to earnings season, it could result in price increases.
There are various earnings plays you can make during the reporting season. However, whatever plays you make, they should be grounded in facts, data, and opinion.
What Are Analyst Forecasts?
Analysts’ forecasts, also known as earnings forecasts, are reports that aim to predict a company’s growth and profitability. These forecasts are particularly important during earnings season as many investors look at the reports published by major Wall Street analysts. Indeed, if there’s a consensus among analysts regarding the outlook for a certain company, that can impact share prices.
It’s important to note that analysts’ forecasts aren’t guarantees of what’s going to happen in the future. They are, however, carefully crafted reports based on empirical data and market experience. The average analyst report is based on economic growth rates, currencies, a company’s underlying financial status, current performance, and other macroeconomic factors.
The aim is to look at a company from a variety of angles to assess its true value and, in turn, its potential in the future. As an investor, you should survey a variety of analysts’ forecasts during earnings season and form an overall opinion based on all the different points of view.
What Else Should You Look For During the Earnings Season?
As well as looking at what the analysts have to say, there’s value in reading financial reports yourself. Here at eToro, we not only have guides on how to read earnings reports but various financial indicators for listed companies. You can use these to get an understanding of the market during earnings season and how companies are performing.
The important metrics to look for when you’re reading an earnings report are:
- Gross Revenue: This is the total amount of income a company has made during the latest quarter/reporting period before any deductions are made.
- Net Income: Also known as net earnings, net income refers to the total amount of sales/revenue minus costs. The end figure represents the net profit or net loss for a company; in other words, how profitable/successful a company has been.
- Operating profit (EBITDA): This metric shows how much profit a business makes for every unit it generates in revenue. EBITDA standards for Earnings Before Interest, Tax, Depreciation and Amortization. So, basically, you can use EBITDA to evaluate how profitable a company is based on its income and expenses.
- Earnings per share (EPS): Earnings per share refers to the company’s profit divided by the outstanding shares of its common stock. This calculation tells you how much money a company makes for every share in its stock.
TIP: When investing, you should review several analysts’ forecasts as their points of view will vary. You can then use these to form an overall opinion on how to proceed.
How to Trade During Earnings Season?
Reacting to reports and making moves in light of new data is the obvious step. Using the resources here at eToro, in particular, our social trading feature, will allow you to do this. However, you can make moves before earnings season. Although this might be more of an advanced earnings play, it can be a valid strategy.
Once you’re familiar with the nuances of earnings season, you can plan ahead. As well as getting your own affairs in order, you’ll have the opportunity to create your own pre-earnings options strategy. There are many ways you can do this. However, the general principle to keep in mind is that shares will often be most volatile in the lead up to and publication of earnings reports.
Pre-Earnings Options Strategy
With the right pre-earnings options strategy, you have the chance to capitalize on this. For example, shares tend to increase in value based on the expectation of positive results. Therefore, if you know when earnings season starts, you can enter trades a week or two ahead of a company’s reporting date.
As well as taking an immediate position, you can set up options to sell immediately after the earnings call ends. What you’re aiming to do here is capitalize on the upswing ahead of the earnings report and get out just before reality sets in.
An earnings report is a public document that shows a company’s profit/loss.
Create a Trading Strategy During Earnings Season at eToro
If you’re a trader, you need to follow the financial reporting calendar closely. Once you know when earnings season is, you should make it your job to read reports, check analysts’ forecasts, and make use of all the tools available at eToro.
Only by understanding the true value of a company can you assess its potential and, in turn, whether or not its shares are worth buying. Earnings season is the perfect time to do this.
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This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments. This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past performance of a financial instrument, index or a packaged investment product are not, and should not be taken as a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.