Companies are required to inform their investors on a regular basis how they are performing. The regulations vary from country to country, but in the United States, companies have to report their performance every quarter - a period that's become known as earnings season.
The quarterly earnings season is an important time for traders and investors alike. It gives traders and investors a window into the performance of companies, sectors and the underlying economy. Information gleaned during this period can be used to inform and plan trades in the following weeks and months.
Insight into sector performance
Four times a year, America’s biggest banks all report their trading performance for the previous quarter. Usually, the results are published within the space of a week or two and can provide an insightful view into the health of the economy and corporate America. If profits are rising, it suggests consumers are borrowing and spending - two signs of a healthy economy. However, if loan defaults are rising, and profits are under pressure, it could be a sign consumer spending is at risk of slowing.
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And it’s not just financial data that’s important. Over the past year, America’s biggest banks have cut tens of thousands of jobs as they look to lower costs. Technology is going to replace some of the roles, which could be a positive sign for technology stocks. However, the loss of these high-paid jobs could hit demand for luxury goods, which is bad news for sales of luxury goods and services.
This example is a great case study of why quarterly earnings are important for traders. They can provide a window into the company reporting and other sectors, giving traders an edge.
Indeed, the information in quarterly reports could provide insights into the economy before other economic data points, known as a forward-looking indicator. Economic data is often backward-looking. Based on the figures recorded for a specific period, it tells us if an economy has been struggling or growing.
Quarterly earnings reports tell us what has happened but can also provide an insight into what is and what could happen. For example, if a company has noticed a drop off in demand for a product and has decided to order less from its supplier, that drop in demand could take some time to show up in economic data, but a trader watching quarterly figures would know it’s going to happen before it’s reflected in the figures.
Of course, one company cancelling a contract isn’t going to have a huge impact on the economy. It’s just one data point. But, by paying attention to quarterly earnings, traders may be able to gather the dots and arrange the picture before the data confirms it. In other words, traders may be able to position themselves for market moves before they happen.
Trading a company’s performance
So far, this article has focused on the information traders can draw about the economy and individual sectors from quarterly earnings reports. However, quarterly earnings reports are also vital for planning trades for that particular stock.
As discussed above, a quarterly earnings report gives traders invaluable insight into a company's operating performance. They can provide insight into the potential risks the company is facing, opportunities and guidance for the next year or quarter.
The information contained within a quarterly earnings report can determine how investors view a business for the next quarter. If a company publishes a poor quarterly earnings report, it could take several further quarters for the market to rebuild confidence.
Traders can capitalise on changes in sentiment following quarterly earnings releases. If a company publishes a poor quarterly earnings release, it will set the tone for the next couple of months. The stock may struggle to recover, and it could be a good signal to short the stock ahead of further turbulence. On the other hand, if the company publishes a positive quarterly earnings report and informs the market it expects the positive trading environment to continue, it could be a sign momentum in the stock is going to continue, pushing the share price higher.
Using quarterly reports for trading
In summary, quarterly earnings reports are important for traders for a couple of reasons.
They give invaluable insight into the trading performance of the business publishing the figures, but they also provide insight into the health of the sector and the general economic environment.
Traders can use the signals provided in quarterly earnings reports to place trades or look for other opportunities in the market.
Disclaimer
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