Four times a year, publicly traded companies release their financial results, giving investors a picture of how businesses are performing, whether conditions are improving or deteriorating, and whether current stock prices are justified by future profit expectations.
For investors, earnings are about comparing actual results with expectations, assessing what management expects in the coming quarters, and determining whether the new information changes the outlook for future earnings.
What is earnings season?
Earnings season is a specific multi-week period each quarter when a vast majority of publicly traded companies cluster together to release their official financial earning (revenue, profits, and losses) and reports for the previous quarter. In the United States, it typically takes place four times a year, following the end of each fiscal quarter.
The main reporting periods generally fall in January and February, April and May, July and August, and October and November. The exact timing varies by company because businesses have different fiscal calendars and reporting deadlines.
During these periods, companies publish their quarterly earnings reports, which usually include an income statement, balance sheet, cash flow statement, comparisons with previous periods, and management commentary. Many companies also hold earnings calls, where executives explain the results and answer questions from analysts and investors.
Earnings season attracts considerable attention because it provides a concentrated flow of new information about corporate profitability. Instead of receiving information about individual companies gradually throughout the quarter, investors receive results from hundreds of businesses over a relatively short period.
Image: Earnings Calendar for the current week on earningswhispers.com
In what order do companies report earnings?
There is no official order in which companies must report their results. Each company announces its own reporting date, subject to applicable disclosure rules and its fiscal calendar. Nevertheless, earnings season tends to follow a recognizable pattern.
Large US banks often report near the beginning of the season. JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and Goldman Sachs are frequently among the early major reporters. Their results are followed by companies from other industries, including technology, industrials, consumer goods, healthcare and energy.
Large technology companies, such as Microsoft, Apple, Amazon, Alphabet and Meta, often report later in the season, although the exact order varies from quarter to quarter.
The first companies to report can also provide investors with an early indication of the economic conditions affecting their industries. Banks, for example, offer information about loan demand, credit quality, consumer finances, corporate borrowing and investment banking activity. Technology companies provide clues about business spending, cloud demand, advertising markets and investment in artificial intelligence. Retailers offer insight into consumer spending, pricing power and inventory conditions.
Why can the first company to report move an entire sector?
The stock market is forward-looking. Investors do not value a company solely on its current profits. They estimate how much money it will generate in the future and discount those expected cash flows back to the present. This means that information about one company can influence the valuation of other companies exposed to similar economic conditions.
Imagine that a major US bank reports stronger than expected loan growth, resilient net interest income and lower than anticipated credit losses. Investors may conclude that the banking sector is benefiting from healthier borrowers and more favourable lending conditions. They could then raise their earnings expectations for other banks, even before those companies publish their own results, leading to a rise in stock prices.
The opposite can happen if a company reports deteriorating demand, rising costs or weaker guidance. Investors may assume that other businesses facing similar conditions could experience the same problems.
Companies in the same sector share common economic drivers. Banks are sensitive to interest rates, credit conditions and loan demand. Semiconductor companies are exposed to chip demand, capital expenditure and inventory cycles. Retailers depend on consumer spending, wages and pricing power. Information from one company can therefore reveal something about the environment facing its competitors.
Moreover, many investment funds trade entire sectors through exchange-traded funds, baskets of stocks and sector-specific strategies. A change in the perceived outlook for an industry can therefore generate buying or selling across several companies at once.
Keep in mind, though, that the reaction is not always uniform. A company may benefit from market-share gains at the expense of competitors, or it may have company-specific problems that do not affect the rest of the sector. Investors need to distinguish between information that reflects a broad industry trend from information unique to the reporting company.
This article was written by Giuseppe Dellamotta at investinglive.com.