Another corporate earnings season is in full swing. It
’s one of the four times a year when companies report their
earnings from the previous quarter to stockholders and forecast how
earnings will look going forward.
Another corporate earnings season is in full swing.
It’s one of the four times a year when companies report their earnings from the previous quarter to stockholders and forecast how earnings will look going forward.
But stockholders aren’t the only ones listening. Some companies can spark a broad market rally when their reports are favorable or roil the markets when they miss earnings estimates.
Of course, the ink is still wet on the accounting reforms passed into law last year. Earnings reports are subject to a company’s accounting accuracy, and the reforms are still unproven in the minds of some people.
Nevertheless, earnings reports can move the markets. Understanding how they influence day-to-day trading can help you gain a broader understanding of what drives Wall Street.
Everyone’s watching
Here are some headlines from the current earnings season:
“Stocks rose for a second day, helped by IBM’s earnings forecast.”
“Treasury prices edge higher as earnings sink blue chips.”
“Stocks surged Monday in response to a better-than-expected earnings report from Dow component Citigroup.”
As you can see, earnings news not only affects stock prices across the market but sometimes spills over to the government and corporate bond markets.
Announcing Earnings
It’s fairly easy to determine when a company will announce its earnings. Several news outlets carry earnings calendars on their Web sites, where investors can type in a company’s ticker and find out recent earnings news and when the next report is due.
Web portals exist that even allow investors to monitor a company’s conference call in which earnings are announced and discussed.
The financial press typically reports the earnings news of higher-profile companies.
At times, the entire financial world appears to be waiting to hear whether one or two key companies hit their earnings targets.
When investors know a company is about to report, it’s not unusual to see the anticipated results reflected in trading activity of the stock or options.
More publicity
More and more companies are telegraphing their quarterly earnings using preannouncements or press releases indicating what day they expect to release complete earnings news.
Even though world events and financial data may have a short-term effect on stock prices, at the end of the day stock prices basically are controlled by two factors: earnings and how much investors are willing to pay for those earnings.
In this instance, earnings are defined as current profit or the prospect for future profit.
Stock investors want to own profitable, growing companies or companies anticipating strong revenues.
Earnings performance is generally the most visible evidence of how well a company is doing.
Earnings can be a key to understanding the market’s behavior and an individual company’s performance.
It takes an experienced eye to interpret earnings reports and respond appropriately; therefore it is important that you consult with your adviser if you have questions about the impact of a company’s earnings report.
This article is not intended to provide specific advice or recommendations for any individual. Consult your financial adviser, or your attorney, accountant or tax adviser with questions.
Dan Newquist is a Registered Representative with Linsco/Private Ledger (Member SIPC). His office is in downtown Morgan Hill.
