What is Earnings Season?
Earnings season refers to the four times per year when most public companies announce their quarterly and/or annual earnings.
Although there are no official dates, earnings seasons usually last about a month and start in:
- mid-January (after the fourth quarter ends in December)
- mid-April (after the first quarter ends in March)
- mid-July (after the second quarter ends in June)
- mid-October (after the third quarter ends in September)
It is important to note that not every company ends its quarters and announces earnings in this traditional pattern, but most do.
During these times, many companies are announcing their earnings via press releases and filings with the Securities and Exchange Commission (SEC). Usually, a company will issue a press release first (which contains key but minimal information), and then make a more detailed filing with the SEC (typically a Form 10-Q or 10-K and possibly additional forms).
These disclosures not only report a company's earnings per share, they provide financial statements and some comment or discussion from management.
How important are profits?
A cool 80 percent of S&P 500 gains have come during earnings seasons since 2013. Over that period, stocks had a perfect streak of rising whenever results were being reported.
That the streak ended in February with the most spectacular equity meltdown since 2011 was a reminder that the foundation isn’t invincible.
Indisputably, this will be another big quarter for profit growth.
After President Donald Trump’s tax cuts, the expected gain in S&P 500 income stands at 17 percent for the January-March period, the fastest in seven years. It’s less clear whether it’s enough to restore order in the market. An identical improvement was under way last quarter when rising bond yields and signs of a trade war sent stocks into a correction.
“It’s the old saying, ‘It’s not the news, it’s how the market reacts to the news that matters.”’
companies saying profits will beat analyst estimates
Strategists from JPMorgan and Deutsche Bank have expressed confidence, citing everything from a weaker dollar to stronger global growth and buybacks as reasons S&P 500 earnings will surpass estimates by as much as 5 percent.
That would be higher than the average margin of 3.1 percent over the past five years, according to data compiled by Bloomberg.
Wall Street analysts are rushing to cut their forecasts for share prices just days before the start of first-quarter earnings season.
Total downgrades on price targets for S&P 500 companies exceeded upgrades by almost 200 over the past week, the most since early 2016, data compiled by Sundial Capital Research and Bloomberg show.
In general, each earnings season begins one or two weeks after the last month of each quarter (December, March, June and September).
Profit margins:
This is the critical component of corporate profitability, since it measures how much profit a company is able to retain after paying costs. S&P 500 operating margins have remained close to a record 13% through most of 2021 because corporations, while faced with higher costs, were able to raise prices.
How important are estimates?
One excellent sign of future stock prices: analysts that are raising estimates.While expectations of future earnings are what matters, it is changes in the trend that moves stocks. “It’s the change to the expectations that matter most,” Raich told me. “It’s what expectations are out six to 18 months from here.”For stock prices to justifiably go higher, EPS estimates must rise at increasing rates too,
S&P 500: 2022 earnings estimates
Q1: up 7.6%
Q2: up 5.2%
Q3: up 7.4%
Q4: up 14.3%
Understanding Earnings Reports and Market Reaction
Earnings reports are quarterly statements released by companies to inform investors about their financial performance. These reports often cause significant stock price movements due to surprises — when the actual earnings deviate from market expectations. Traders can exploit these movements using options, which allow them to take advantage of price swings with limited risk.
Common strategies for trading earnings:
Trading stock earnings with options can be a powerful strategy for capturing profits during periods of high volatility.
1. Straddle: Buy both a call and a put option at the same strike price and expiration date, betting on a large move in either direction.
2. Strangle: Similar to a straddle, but the call and put options are purchased at different strike prices.
3. Iron Condor: A more complex strategy that involves selling a strangle and buying a strangle further out, limiting both potential gains and losses.
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