Every quarter, companies in the United States are mandated by law to release their earnings. This period, which is commonly known as the corporate earning season provides very important opportunities that market participants can take advantage of. 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.