A trader's guide to earnings season: What is it and how do you trade it?

Put simply, earnings season is the Super Bowl of the financial world.

For a few weeks each quarter, thousands of publicly traded companies open their books to the public, with markets left to make sense of a flood of company data.

If you are trading with a broker like OANDA, these periods can offer significant volatility and trading opportunities - if you know how to navigate them.

Earnings season, often simply referred to as earnings, is the period when most publicly traded companies release quarterly financial reports. Typically lasting around six weeks, these reports offer a detailed look into a company’s health, including revenues, expenses, and importantly, outlook for the future.

While companies report throughout the year based on their specific fiscal cycles, the majority follow the calendar year. Typically, this means that each of the four earnings seasons kicks off about two weeks after a quarter ends. For example:

• Q1 earnings, covering results for January through March, are typically released in mid-April to May
• Q2 earnings, covering results for April through June, are typically released in mid-July to August
• Q3 earnings, covering results for July through September, are typically released in mid-October to November
• Q4 earnings, covering results for October through December, are typically released in mid-January to February of the following year

It should be noted, however, that while most publicly traded stocks release their reports in the first four weeks of each season, there are some outliers.

Sometimes referred to as “off-cycle” reporters, some companies opt for a fiscal year that runs from January to January, rather than the calendar year. In most instances, this means that some companies report their earnings results a month later than others, with NVIDIA being just one example.

To understand each release, and importantly, how the markets will likely receive it, traders typically focus on three key pillars:

1. Earnings per share (EPS): This is the company’s net income, or profit, divided by the number of outstanding shares. As a metric, EPS indicates profitability on a per-share basis, with a rising dollar amount indicating that a company is improving at generating capital for its shareholders.
2. Revenue: Also called the “top line,” it is the total dollar amount generated from sales, whether for a physical product or a service. While revenue numbers can be a useful yardstick for overall company health, they provide no indication of profitability or long-term sustainability.
3. Guidance: Especially in world equity markets, it is said that the future matters more than the past. As such, forward guidance is a critical part of any earnings release, with the CEO of the respective company offering vital insight into future performance and, ultimately, whether they are likely to meet, exceed, or fall short of expectations.

While the numbers play an important role in any earnings release, markets typically focus more on how company executives rationalise recent performance and, crucially, forecast future performance, rather than on the data alone.

Caterpillar (NYSE:CAT) EPS history, https://investors.caterpillar.com.

The information presented is historical information, and past performance is not indicative of future results

Typically, an individual earnings release for a given company will follow this schedule:

1. Data release: Quarterly data is released shortly after the market closes or just before the opening bell, including headline EPS and revenue numbers. Depending on the company, other metrics may also be closely watched, such as Tesla’s electric vehicle deliveries compared to previous quarters.
2. Conference call: Shortly after the numbers are released to the public, a conference call is held, during which the CEO typically delivers a prepared speech that provides context for the numbers and insight into the scope of future projects, infrastructure investments, and the company’s overall expectations for the upcoming quarter and beyond. Markets pay special attention to the tonality of these speeches, with a sense of optimism often boding well for the stock price, and vice versa.
3. Follow-up Q&A: After delivering a rehearsed speech, analysts from banks and other financial institutions are invited to ask the CEO and other executives questions. Owing to the less-prepared nature, this is where any ‘slip of the tongue’ moment could inspire the market volatility that is often associated with earnings season.

It’s important to remember, however, that earnings releases occur outside typical market trading hours, so options for accessing the market are limited, especially for retail traders. As such, after-hours trading is usually dominated by financial institutions, and when combined with lower trading volumes, an individual stock’s price can move substantially, gapping up or down at the following market open.

When making sense of any earnings release, one important distinction is how the results, both in the data and forward guidance, meet pre-conceived expectations, typically formed by Wall Street analysts doing the media rounds, or between retail traders as a community, sometimes referred to as the “whisper” or “whisper numbers”.

Naturally, previous quarterly performances also set expectations, with otherwise robust results on paper sometimes poorly received by markets if a company is unable to keep pace with prior strong periods. Let’s take a look at an example:

Releasing numbers in late January, Alphabet showed not only that the company was growing faster than expected but also that it was more profitable¹.

• Earnings per share (EPS): $1.64 (Actual) vs. $1.59 (Expected) - 3% beat
• Revenue: $86.31 Billion (Actual) vs. $85.33 Billion (Expected) - 1% beat

On the above results alone, most would expect the stock price to rise, but markets became concerned with other performance metrics, especially ad revenue:

• Ad revenue: $65.52 Billion (Actual) vs. $65.74 Billion (Expected) - 0.3% miss

Despite falling just shy of expectations, GOOGL stock tumbled over 5% after markets reopened the next day, rationalised by media as stiffer competition and as previous investment in AI projects yet to come good in boosting ad sales.

At least in some capacity, making sense of earning releases means focusing less on results alone and more on how they meet expectations.

While it seems obvious, it should be remembered that money is made in the stock market by correctly predicting future stock prices, not by knowing what has happened in the past. As such, markets are always looking forward, attempting to justify current pricing against released earnings data.

By virtue, markets can prove incredibly fickle, especially in the case of a stock like Alphabet, with years of outperformance forgotten in the face of the slightest miss to expectations.

When simplified, the outcome of an earnings report typically follows one of three outcomes:

1. Beat & raise: Results beat all expectations, causing stock price to rise
2. “Whisper” miss: Results beat Wall Street expectations, but fall short of unofficial hype, causing stock price to fall
3. Relief rally: Numbers are poor, but not as much as originally feared, causing stock price to rally

While there are virtually limitless strategies to take during earnings season, here are a couple of strategies you might like to consider, based on your own personal trading preferences:

While earnings season is inherently unpredictable, the weeks prior to the release can often be more consistent, with most following pre-existing media narratives on expected company performances.

For example, it would be considerably against the grain to suggest that Sandisk will miss expectations in its upcoming earnings release, given its recent track record and the current demand for computer memory from AI.

As such, and in line with market expectations, we can expect Sandisk stock to benefit from increased demand driven by hype around the event, which is where this strategy stands to profit, typically exiting the position prior to the earnings release.

An important distinction here is that you don’t have to share the same conviction as the market; rather, you need to gauge the general market feeling ahead of the release.

While it may seem obvious, the risk in trading on quarterly earnings reports is the unknown outcome, with even the safest bets carrying significant risk if the data reflect poorly on company performance.

To mitigate this risk, some traders wait for the report first, and then place a position if a company beats and raises guidance, in the hope that positive momentum will continue and drive stock price higher.

As can be imagined, this strategy is most effective when the narrative surrounding a stock changes, typically meaning the quicker a position can be placed after a “surprise” positive result, the better.

While earnings season is often responsible for big market moves, it also carries a heightened level of risk compared to normal market conditions.

While generic trading advice is to have an exit strategy, set stop-loss levels, and establish a predetermined risk per trade, this is especially important during earnings season.

Here are a few further bits of advice:

• Position sizing: While you should never go “all-in” on any trade, this goes double when trading during earnings season. Considering the higher potential for market volatility, traders should place smaller-than-normal positions to maintain a consistent risk structure.
• Don’t chase: If you’re late to a stock that has just gained 10%, statistically, the move is likely already exhausted, and price will need time to consolidate before a potential move higher. In lieu of a well-rehearsed plan to cover any eventuality, in this scenario, focus is better spent identifying another opportunity rather than “chasing”.
• Don’t ignore correlations: While it’s natural to have a watchlist of a few stocks ahead of their respective earnings releases, industries remain closely correlated across the whole season, especially regarding shared themes like oil pricing, monetary policy, and AI infrastructure spending. For example, if Goldman Sachs misses expectations, we can expect other banking stocks to “share the load”, even if they are yet to report.

To wrap things up, here’s a 15-word glossary to help you better understand some key terminology surrounding earnings season:

1. Beat/miss: A beat is when actual results exceed analyst or market expectations; a miss is when results fall short.
2. Burn rate: An important metric to watch for technology companies that have yet to turn a profit, burn rate is the rate at which a company spends its cash reserves to maintain business operations.
3. Buyback: When a company repurchases available stock to reduce total supply, often in an attempt to artificially increase EPS, this is referred to as a buyback, or stock buyback.
4. CapEx: Capital expenditure, or CapEx, refers to the money a company spends on physical assets to support long-term business operations, such as data centres or manufacturing equipment.
5. EPS: Earnings per share, written short-hand as EPS, is the bottom-line profit divided by the number of issued shares, and is used as a key measure of business value.
6. Extended hours: Commonplace in media coverage, extended hours or ETH refers to the trading sessions pre- and post-regular exchange hours, when companies typically release their quarterly earnings results.
7. Gross margin: A metric used to determine efficiency and profitability, gross margin is the total revenue minus the cost of goods sold.
8. Guidance: Also referred to as forward guidance, this refers to the executive management’s official company projections and expectations, shared during a conference call after every quarterly earnings release.
9. Implied move: Used as part of trading analysis before an earnings release, an implied move is the price action of the options market for a given stock on its earnings date.
10. Net income: Otherwise, the “total profit”, net income is the monetary amount a company has after all expenses, taxes, and interest have been subtracted from revenue.
11. Organic growth: A metric typically used to gauge a company’s robustness, organic growth refers to revenue growth from core business operations rather than mergers or acquisitions.
12. Retention rate: Of particular importance to companies like Netflix, which rely on subscription models, the retention rate is the percentage of consumers who continue using a business’s services over two distinct periods, rather than cancelling.
13. Revenue: Often referred to as the “top-line”, revenue is the dollar amount generated by sales before any deductions, be it the cost of production, taxes, or interest.
14. Short squeeze: Characterised by a rapid price spike, a short squeeze occurs when investors who previously held short positions are forced to buy shares to cover losses.
15. Whisper: Sometimes referred to as “whisper numbers,” these are the unofficial expectations held by traders as a collective, which may differ from those of Wall Street analysts.

With us, you trade share CFDs.

This means that you take a position on the price of the share, without owning the underlying share itself.

So if you feel the share you are trading will go up in value, you can take a long position and if you feel the value of the share will fall, you can take a short position.

• Available using our MT5 platform, OANDA mobile app or TradingView
• An award-winning* broker you can trust
• Great customer service

*Check out the full list of our awards here

Trade share CFDs now

Footnotes:

¹Alphabet Announces Fourth Quarter and Fiscal Year 2023 Results