Trading During US Earnings Season: What You Need To Know

For investors in the world’s largest stock market, the earnings season is one of the most closely-watched events when listed companies report their quarterly results.

Officially called a Form 10-Q, public companies are required by the market regulator–the Securities and Exchange Commission (SEC)– to release this information to shareholders and the public every three months.

During the US earnings season, companies will divulge key information that give investors more clarity on the state of the business over the reported period.

This includes key metrics such as revenue growth, gross margins, operating margins, and guidance on future growth.

When is earnings season?

For a large number of public companies in the US, the quarterly reporting periods tend to follow the calendar year.

So, the release of results usually falls within the two months after the end of each calendar quarter.

For example, for a company that follows a traditional January to end of March quarter, it will usually release its earnings numbers anywhere from late April to the end of May.

However, some companies differ in that they have reporting periods that don’t adhere to a traditional calendar quarter. These companies will have “fiscal quarters” and “fiscal years” specific to that firm.

Take Zoom Video Communications for example. The video-conferencing company has a first quarter fiscal year 2023 (Q1 FY2023) earnings period that covers the three months ending 30 April 2022.

Hence, the company reported earnings for that period in late May this year.

Why do earnings matter?

Earnings season is important for a number of reasons. Primarily, it provides investors (and analysts that cover the stocks) an opportunity to analyse and reassess the prospects of businesses reporting.

As mentioned earlier, this is based on the latest numbers but also–more importantly–forward guidance that is provided by management.

This relates to what management says it expects to see on a variety of business metrics.

Ranging from revenue growth to operating margin, these numbers are guided for the upcoming quarter as well as the full fiscal year.

In reaction to these earnings numbers and management guidance, share prices could move dramatically.

How does it impact trades?

Earnings season is a period when there tends to be more volatility in the stock market.

The release of company earnings also takes place outside of market-trading hours.

As a result, a stock’s reaction (up or down) could be amplified based on the lower liquidity in the market during pre-market and post-market trading.

Companies to look out for

Investors should be on the lookout for large-cap and highly liquid stocks when the US earnings season comes around.

That’s because the combination of higher liquidity and more coverage from analysts, mean that the broader market gravitates towards them.

Some examples of these types of stocks include all the mega-cap tech stocks, such as:

• Microsoft
• Apple
• Meta Platforms
• Alphabet
• Amazon
• Nvidia
• Tesla

Other large-cap, blue-chip technology stocks (that are highly liquid) can also garner attention. These would include the likes of Salesforce.com, Adobe, and ServiceNow, among others.

In other sectors, large blue-chip companies like JPMorgan Chase, Johnson & Johnson, Starbucks, and Home Depot are also some of the stocks investors can keep an eye on.

Is earnings season a good time to trade?

The US earnings season comes with opportunities to trade given the typical prevailing market conditions.

That’s mainly down to the event-driven trading sentiments derived from earnings releases.

Given management guidance and the broader macroeconomic conditions, the moves up or down in a stock can create a lot of volatility for the broader market as well.

On the whole, volatility in the market is a positive factor for investors who have a short-term, trading-oriented focus.

Earnings results from one company can also impact the share prices of peers that operate in the same sector. Therefore, it’s important to be aware of what events are driving share price movements.

How to use CFDs during earnings season?

A Contract for Difference (CFD) can be used by traders during the earnings season to take advantage of opportunities that the market presents.

This is due to the fact that investors can ‘go long’ or ‘go short’ on stocks using CFDs.

Finally, it’s crucial that investors focus on having a suitable trading plan during the earnings season to properly manage the level of risk exposure.