Every quarter, companies in the
United States are mandated by law to release their earnings. This period, which
is commonly known as the earnings season provides very important opportunities that
market participants can take advantage on. This is because stocks tend to make
major moves before and after the season. For example, Apple’s stock has declined
by more than 20% after the past earnings season. This is because the company
disappointed the market by lowering its guidance.
This week, the earnings season started
officially and will take the next three weeks. As it always does, the season
started with the release of earnings from banks. This is followed by the
release of technology and other companies. Today, Netflix will be the first big
technology company to release its quarterly earnings.
In the past, trading the earnings
season was an easy thing. Traders used to buy companies that reported a beat in
the earnings and revenues. They shorted companies that missed the expectations.
Today, even with insider information, it is impossible to know how the market
will interpret the data. This is simply because the market looks at specific
data. For example, in this week’s bank earnings, investors are looking at how
the specific segments of the operations did. For example, in this week’s
banking results, they were looking at the performance of the Fixed Income
Currencies and Commodities (FICC) segment. In today’s Netflix earnings, they
will look at the headline EPS and revenue numbers but the most important number
will be the user growth.
Another important measure that
you should look at during the earnings release is the guidance. Investors
believe that the past quarter’s earnings are lagging indicators. Instead, they
focus on the guidance issued by the company. The guidance is simply the amount
of money the company expects to make in the next quarter and in the next year.
This data is important to investors because it helps them understand whether
the management expects growth or slowdown.
Another important issue you need
to know about the earnings season is that there are relationships between
companies. For example, a better-than-expected result from a company like
Netflix means other technology companies may do well. In addition, if a consumer
staples company like Unilever reports better results, it means that other
staples companies like Proctor and Gamble too may do well.
Then, there is the issue of the
relationship between the companies and indices that track them. For example,
excellent reports and guidance from companies like Apple and Google means that
an index like Nasdaq may do well. This is because these companies are the
biggest constituents of the index. The same is true for an index like Dow
because Apple has a big weight in the index. The chart below shows how closely
correlated the Dow, S&P, and Nasdaq are.