Once every quarter, investors in the stock market feel a communal tingle at the base of their spines. Their inner alarm clocks go off, their pulses race, their smartphone notifications go haywire, and their conferencing software throbs.
Health and tech issues notwithstanding, that can only mean one thing: It’s almost earnings season.
When does earnings season start, what happens? Why do investors care about it so much?
What is Earnings Season?
The stock market earnings season is the time when all of the companies listed on the stock exchange announce their financial results. It’s not so much a “season,” since it happens four times a year. But they’ve stuck with the word “season” and nobody’s complained, so neither will we.
When does earnings season start? Usually, it happens for a couple of weeks after the close of every fiscal quarter of the year:
- End Q1: March 31 – Earning season: mid-April
- End Q2: June 30 – Earning season: mid-July
- End Q3: September 30 – Earning season: mid-October
- End Q4: December 31 – Earning season: mid-January
Most public companies issue their financial reports when earning season commences, but not all of them do. Some companies have different quarterly structures from the norm, so a few stragglers announce their earnings in, say, early May or early August, for example. Whenever it decides to do so, every publicly owned company must make quarterly and annual reports every year.
The release of a company’s earnings report is usually the biggest day of its quarter (not including the release of a major product line, like a smartphone or chicken sandwich or something). It usually happens after the stock market closes, so as not to over-affect the stock’s performance during normal trading hours. All investors’ eyes are focused squarely on the financial results, as they plan their portfolio strategies for the future based on what they hear.
Companies usually announce the date of their next earnings reports weeks or even months in advance. If you invest with an online brokerage, it should be relatively easy to find out when an earnings report is imminent.
Fidelity, for example, shows a little bullet with the letter E next to the stock symbol in your portfolio when its earnings report is near. This can be very helpful. You can also find earnings calendars at many major financial websites. Yahoo! Finance has one of the most complete listings you can find.
What Happens with an Earnings Report
A company reports its earnings in two ways: One, they must legally do, and other, they probably should do, but technically don’t have to.
10-Q and 10-K Reports
Earnings announcements are timed to coincide with the release of a company’s 10-Q or 10-K report. All companies must file a 10-Q during each of the first three quarters of their fiscal year with the Securities and Exchange Commission (SEC). For the final quarter, they must provide a 10-K report, which covers the entire year. All reports are made available to the public.
The 10-Q is simply a quarterly statement of the company’s financial performances. According to the SEC, the 10-Q addresses:
- Financial Statements
- Management’s Discussion and Analysis of Financial Condition and Results of Operations
- Quantitative and Qualitative Disclosures About Market Risk
- Controls and Procedures
- Legal Proceedings
- Risk Factors
The 10-K also contains all of those elements, along with more, since it’s an annual summary.
Conference Calls
After the earnings reports are filed, many companies schedule a conference call to discuss their results. These calls are now open to anybody who wants to listen in — previously, they were only open to institutional investors and market analysts.
The conference call usually includes the company chairperson, CEO, and CFO. Other executives who oversee relevant aspects of the report may be on the call, as well. They discuss the results in a high-level fashion, covering the issues and factors that may have driven them.
Normally, an earnings conference call ends with a question-and-answer session. Institutional investors and analysts are invited to quiz the company panel about their results, what they mean, and what they have in store for the future. As you might expect, this is the part of the conference call that most people look forward to (except for perhaps the company panel). It’s the time when the company’s accountability to its shareholders is directly confronted.
While companies aren’t legally required to hold a quarterly conference call (only to file and publish the report), it’s usually a good idea for them to do so. It’s the one time every quarter when they interact semi-directly with their investors. Conference calls are the ways that they whip up excitement about a good report and paint an optimistic picture of the future. Alternately, it may be how they try to calm everyone down over a disappointing quarter in an effort to stop investors from jumping ship.
Some companies that don’t have much need for PR, however, just quietly submit and publish their 10-Q and 10-K reports every three months.
What Does Earnings Season Mean for Investors?
Earnings season carries a lot of implications for investors, especially those who work with short positions. But these results aren’t uniform and can be a little confusing for new investors who are looking to make sense out of the market.
Positive Earnings Reports
In theory, if a company issues a super-positive earnings report, its stock price should increase a little bit afterwards. Usually, that’s exactly what happens.
But not always. Sometimes, a company will beat its expectations, post a positive earnings report, and then see their share price decrease a little bit afterward. What’s happening?
Most of the time, it has to do with the rhythm of the stock market, financial analysis, and investor sentiment more than anything the company can control.
For example, sometimes, a stock does better in advance of a solid financial report because investors are looking forward to one. This happened with Facebook in 2017. Analysts were predicting a monstrously successful Q3 for days before they held their earnings call, so investors were buying early to catch the expected positive wave.
But when Facebook finally announced its earnings, many investors decided to cash in on their profits. When selling happens at a large enough volume, stock prices go down. That’s what happened with Facebook, even though they generally met expectations that quarter.
Sometimes, investors sell off their shares in anticipation of other investors selling off. They fear a repeat of Facebook scenario happening again, so they try to unload their positions before everybody else unloads theirs. They figure they can always go back into the position when the price goes down again. This sends share prices lower, too. It’s kind of a vicious circle. Throw panic-selling into the equation, and it gets even worse, as they tend to do when investors let emotions get in the way.
Even if a company’s earnings results for the previous quarter are net-positive, that doesn’t always mean that the whole report is positive. Oftentimes, a company beats its projections but also warns about challenges that may be coming around the bend. In turn, they may lower their earnings “guidance,” revising their revenue targets downward for the next quarter. This makes share prices lower, even after a successful quarter.
Negative Earnings Reports
A positive report doesn’t guarantee a share price increase. But the converse of this is not usually true.
It’s harder to spin a negative earnings report in a way that boosts share price. If a company falls short or reports a revenue loss, they can expect investors to sell their positions, which will drive the price down. Of course, some investors may welcome this development because the price has gotten low enough for them to enter into the stock. But many prefer to wait to see how the company rebounds.
Whether the report is positive or negative, the thing to remember is that its immediate effect on share prices is temporary — probably. Earnings season is, understandably, a volatile time. Investors absorb all of the information from reports and use it to guide their movements. Those who take short positions are likely to execute on them during earning seasons, and that will affect the price. Those changes will, in all probability, resolve in the aftermath of the report.
What to Look for in an Earnings Report
You probably won’t catch all of the information in a given earnings report. That’s fine — you can access it anytime you want if you think you’ve missed anything crucial. But during the call (or after the release of the report), look for these data points first:
- Income statement (revenue, net income, earnings per share, operating expenses)
- Balance sheet (assets, liabilities, shareholder equity)
- Cash flow analysis
- Future guidance
Focus on the data as much as possible. Don’t give too much credence to the accompanying press release — remember that’s more of a PR play than an informational one. Look at the numbers.
Gorilla Trades: A Plan for All Seasons
Gorilla Trades keeps its finger on the pulse of the stock market every day, all year. We help our customers to pick the most promising stocks that will carry them through the wild ride of earnings season. Find out more by signing up for a free trial.
