FTG Blog - What is earnings season?

What is Earnings Season?

Earnings season is one of the busiest times of the year for those who work in and/or watch the financial markets, as virtually every large publicly-traded company will report the results of their last quarter. Analysts and account managers typically set their guidelines and estimates to correspond to specific quarters or fiscal year ends, so the results reported by corporations during earnings season often have a big role in the performance of their stocks.

How Earnings Season Works

Although there are no official dates, earnings seasons usually last about a month and start in mid-January (after the fourth quarter ends in December), mid-April (after the first quarter ends in March), mid-July (after the second quarter ends in June), and mid-October (after the third quarter ends in September). It is important to note that not every company ends its quarters and announces earnings in this traditional pattern, but most do.

During these times, many companies are announcing their earnings via press releases and filings with the Securities and Exchange Commission (SEC). Usually, a company will issue a press release first (which contains key but minimal information), and then make a more detailed filing with the SEC. These disclosures not only report a company’s earnings per share, they provide financial statements and some comment or discussion from management.

Why Does Earnings Season Matter?

Earnings season can be a time of heightened volatility and trading volume in the markets as investors react to the onslaught of news and new information about companies. Much of this reaction centres on the difference between what companies were expected to report and what they actually reported.

Often, short-term investors are more affected by the volatility of earnings season than long-term investors. However, all investors are responsible for keeping up-to-date on their investments and following the earnings performance of their companies.

Market Expectations for the Quarter

Every company has a number of market commentators or analysts who give their opinion on how they expect the company to perform in terms of Sales and Earnings (profits). The Market Expectations are usually the average of all market commentators. Let’s take Microsoft as an example:

Sales Expectations: Microsoft’s most recent quarter the market expected sales to come in at $25.3 billion for the quarter.

Earnings (Profits) Expectations: Are reported as EPS (Earnings Per Share). EPS is simply the net profits of the company attributable to each share on issue. The market expected EPS for Microsoft to be $0.79 cents per share.

If a company beats the market expectations it can cause the share price to rise (but not in all cases) as the company has performed better than what the analysts had expected. For example, Microsoft actually delivered sales of $26.07 billion and EPS of $0.83 far surpassing analyst expectations. This was very positive for Microsoft and the share price rose on the news.

The Bottom Line

Earnings means profit; it’s the money a company makes. It is often evaluated in terms of earnings per share (EPS) – this is the most important indicator of a company’s financial health. Earnings reports are released four times per year and are followed very closely by Wall Street. In the end, growing earnings are a good indication that a company is on the right path to providing a solid return for investors.