Key Points
Earnings season happens 4 times each year when public companies report numbers from the previous quarter.
The SEC requires certain disclosures from publicly traded companies; however, reporting requirements vary based on market cap and where shares are traded.
Earnings releases are often market-moving events, but investors must know how to decipher the data before acting.
The first quarter has ended, which means earnings season has arrived, and investors are eager to see results. What’s earnings season? Unlike football season, you won’t need to upgrade your cable package or clean the grill. However, you will want to learn how to digest earnings reports and conference calls so your portfolio can built on informed decision-making. Not every company has to follow the same reporting requirements. Still, the largest public companies all follow a similar script, which means familiarizing yourself with lots of jargon and industry terminology.
In this article, we’ll discuss how to play earnings season and what information you should be most conscious of when interpreting earnings releases.Get breaking market news alerts:Sign Up
Earnings season happens once per quarter when companies publicly release financial data. These releases include data like revenue, margins, expenditures and profits, and executives host a conference to relay the results and take questions from analysts.
Companies release earnings on predetermined dates so that analysts can join the call and ask questions about the data and guidance provided by executives. While a single earnings report doesn’t always paint the whole picture, these releases offer glimpses inside public firms’ machinery and can help detect performance trends.
Why Earnings Season Matters for Investors
Companies don’t all release their earnings data simultaneously, but they tend to come in batches after the numbers have been compiled from the quarter’s end. Firms release data on their schedules without industry or sector timelines. For example, Walt Disney Co. (NYSE: DIS), BP plc (NYSE: BP), Uber Technologies Inc. (NYSE: UBER), Toyota Motor Co. (NYSE: TM) and Robinhood Markets Inc. (NASDAQ: HOOD) all recorded earnings during the 2nd week of May.Earnings season is a time for public companies to show their work. Numbers are released and compared against analysts’ projections to see whether the firm underperformed or overperformed expectations. Earnings beats (exceed expectations) or misses (underperform expectations) can outsize stock prices and investor sentiment.
Impact on Stock Prices
Earnings data is released before or after market hours to prevent leaks during trading, but that doesn’t mean the impact on stock prices is muted. Earnings season is often the most volatile time for stocks because large beats can send a stock skyward, while a large miss can send another plummeting. The immediate impact can be fierce, like when NVIDIA Inc (NASDAQ: NVDA) posted an earnings beat for Q4 2023 and the stock gained 16% the following day.
Investor Sentiment and Market Trends
Individually, an earnings report doesn’t make or break the market. However, when taken into broader consideration, a series of positive or negative earnings data can disrupt market trends and sentiment. Suppose companies consistently beat expectations across different sectors (or the market as a whole). In that case, it’s usually a good sign of economic strength, which can embolden investor sentiment and create a wave of buying activity. Investors can track earnings data using MarketBeat’s earnings calendar tools.
How Companies Prepare and Present Earnings Reports
Releasing earnings is a multi-step process involving both internal and external reviews. Companies gather data internally for their balance sheet, income statement and cash flow statement and review it through many procedures. The company’s executives, legal team and an outside auditor check the data before submission to the SEC.
The Role of GAAP
GAAP stands for Generally Accepted Accounting Principles, the set of guidelines the SEC enforces regarding earnings releases. Earnings reports must contain certain data, and companies must record items like revenue and expenses in a specific fashion. GAAP helps standardize earnings releases, making it easier to interpret (and verify) the numbers.
Commonly Reported Metrics
To interpret earnings releases correctly, you’ll need to understand these 3 metrics:
Revenue – Total sales for the quarter before expenses and operating costs are deducted.
Guidance – Sales projections, growth estimates or any other forward-looking statement about the company’s future performance expectations.
The Role of Analysts During Earnings Season
What is earnings season without the analyst estimates? Analysts who cover specific companies make earnings estimates based on publicly available data and past figures. These analysts come from investment banks and research groups, often from varied backgrounds and expertise. This diversity of viewpoints helps form a consensus using a wide range of data and opinions.
Earnings Estimates and Their Importance
Analysts don’t have access to insider information and are simply making their best guesses about a company’s future numbers. The incentives to make a favorable estimate are also strong; no CEO wants a bearish analyst to ask questions on a conference call. However, estimates are still crucial because they form a benchmark when aggregated. The resulting stock price movement can be substantial if the company beats or misses the consensus view.
Strategies for Investors During Earnings Season
How can retail investors use earnings season to their advantage? Here are 3 strategies to consider when digesting company reports.
How to Interpret Earnings Reports
Plenty of information is released during earnings, and investors should focus on key metrics that can be compared to previous results. EPS and revenue growth were mentioned above, but you should also focus on profit margins (how much of each dollar of revenue is retained as profit) and any outliers like significant one-time expenditures. Business language has a learning curve, so familiarize yourself with industry terms before attending conference calls.
Look Beyond the Headlines
Have you ever had a bad day at the office? Sometimes, public companies have a terrible quarter, too, but that doesn’t mean it’s a sign of things to come. Earnings research often involves digging into the numbers to extrapolate more significant trends. Compare figures against other companies in the same stock sector to see if the performance aligns with industry standards. Review one-time events like chargeoffs or capital purchases, and consider the broader economic scope when evaluating the data.
Consider Long-Term Trends vs. Short-Term Results
Earnings data only covers three months of the year, a very short time to form opinions about long-lasting trends. That’s why evaluating company earnings is a balance. Investors want to see short-term results because a sequence of good results can spur long-term stock appreciation. However, context is critical, and investors must always consider how earnings data influences short—and long-term performance.
Conclusion
Earnings season is exciting for investors because good and bad results can generate large stock price moves. However, for long-term investors, earnings season is a balance between past results and future expectations. Earnings numbers and guidance can relay how the company is performing and where it expects to go in the next year. Still, a single earnings release must be considered in a larger context to be useful for investors.
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