Four times a year publicly traded companies release their financial statements and required disclosures in what has been dubbed “earnings season.” The Securities and Exchange Commission (SEC) requires these reports as a way to provide better transparency to investors as to what exactly they are investing in and how the company is performing.
What is earnings season, and what exactly should you be on the lookout for? Here’s what you need to know.
When is earnings season?
While there are not any official dates the SEC requires to mark the beginning or end of earnings season, the majority of publicly traded U.S. companies report their quarterly earnings more or less around the same time. The only official requirement is that the earnings report be released within 45 days of the end of each quarter
Most companies follow a fiscal calendar of Jan. 1 through Dec. 31, with earnings season being the weeks following the end of each fiscal year quarter — meaning March, June, September and December. The end of each month marks the “beginning” of earnings season for that quarter, a time when company earnings reports begin rolling in and markets begin to react accordingly.
Here’s a rough timeline of when reports begin posting:
- First quarter (ends March 31): Earnings season begins around April 15 through the end of May.
- Second quarter (ends June 30): Earnings season begins around July 15 through the end of August.
- Third quarter (ends Sept. 30): Earnings seasons begins around Oct. 15 through the end of November
- Fourth quarter (ends Dec. 31): Earnings season begins around Jan. 15 through the end of February
What to keep an eye on during earnings season
Earnings reports are a good way to see if there is value in your investment. If you follow them regularly, you will be more likely to spot a buying opportunity or decide it’s time to sell an underperforming stock.
There are generally four key factors to focus on:
- Revenue and earnings that show a company’s potential for growth and overall performance in an income statement.
- Guidance that refers to a company’s financial projections.
- Margins, which tell an investor how efficient a company is with managing its money and helps measure profitability.
- Reactions that reflect investor sentiment and how they impact on the stock price.
Also crucial to watch: Growth stocks, which are typically expected to grow at higher rates than the rest of the market. If their earnings reports are positive, they can offer big upside potential to investors.
It may be a good idea to reduce exposure in growth stocks before an earnings report to hedge against possible short-term swings in price. Should the stock fall, but confidence remains high, it could prove to be a good buying opportunity, and should the company report weak earnings and the price fall, your exposure will be minimized.
Also, related stocks in a particular sector can be affected by one company’s earnings reports. Stocks in the same industry will typically trade in similar ways because their businesses are affected by similar factors. For example, if Apple trades higher after its earnings report citing increased demand for phones in emerging markets, rivals Samsung and Huawei might also trade higher despite not releasing reports yet.
Why is earnings season important?
Information released during each earnings season shows an individual company’s financial health and future forecasts of success, but also speaks to broader economic conditions as well. Both institutional and individual investors often react to earnings data to see if the company meets or beats market expectations. Consecutive quarters of weak earnings reports could indicate an oncoming bear market.
Interest rates can also impact borrowing costs for companies and lead to lower earnings if consumer spending decreases, or the cost to produce a good or service increases.
Bottom line
Earnings season is an important time to evaluate your investments and keep abreast of how they’re performing each quarter. Keep an eye out for things like revenue, guidance, a company’s margins and the market’s reaction. Overall, the best bet is to stay diversified and invested for the long-term.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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