Consistent earnings are a pre requisite of any individual stock in the long run. An extension would be performance of the overall stock market. If a majority of the companies, particularly the popular brands are enhancing their sales and income the traders are expected to be confident about future market prospects. If on the other side if earnings Netflix are below expectation lines it is a sense of worry for the market.
During a trading season, a traders needs to track three basic things which are earnings seasons, followed by bellwether performance and the results achieved with overall expectations.
The term earning season depicts the period of several weeks that begins after each quarter ends. Typically the months are January- February, the months between April to May, July to August along with the months of October and November. This is the time frame where many US corporations go on to report their quarterly incomes and profits.
The thing traders need to keep an eye upon
Three important areas are there which a trader needs to lay down considerable emphasis during the earnings season. They are as follows:
- Earnings surprises
This connotes a situation where the earnings are slightly better or worse as per prediction of analysts. The negative or positive earnings surprises could have considerable impact on the overall performance of a stock. This can propel a stock in a meaningful manner in a downward or upward trend.
During the earning season, traders give due attention whether a major chunk of earning surprises tends to be negative or positive. If it tilts towards a positive situation it means that the business is doing really good and bullish trend is expected for an overall market. On the other side a negative earnings could develop havoc for the stock price of the company and a downtrend is expected. This can continue for the next few days or even extend in the coming years. The investing public is scooped behind which mean that they hold back their stocks. Such a trend can weaken the stock marketing in the beginning.
- Bellwether performance
There are some companies who are considered to be trend setters of the stock market. Till the period of the 20th century IBM and General Motors were considered to be bellwethers. If one out of the two companies stumbled it did have a considerable impact on the overall stock market. In the present day context Apple and Microsoft have been entrusted with that role, which the other companies expected to follow suit.
If a company which is a leader is performing well it works out to be a good sign for the economy and even the positive effects are seen on the overall economy. Sometimes the performance of the stocks of such companies can be below expectations or above average. This would send out warning signs to the stock market and even the overall economy as a whole.
- The results in line with the overall expectations of the market
The analysts in most of the financial firms spend a lot of time and money in figuring out how a company is expected to perform in the future. Before the season of earnings sets in there is always a given set of expectation among the masses on how they are going to perform based on the inputs provided.
In case if the actual estimates are in line with the expected trends it does point to a healthy sign for the stock market and economy in general. On the other spectrum if the overall earnings are perceived to be negative, it can have a pulsating impact on the investors in the days to come or even the coming quarter.
To conclude sales growth along with earnings are pillars on trader perceptions and performance of the stock market in general. The traders can prepare for earnings season by keep a track of the stocks they are planning to invest. The focus is on fundamentals and the emotional aspect of investing is seldom taken care. In certain cases the financial strength of a company is perceived to be the general health of the market. The results in line with expectations have more significance rather than profit and loss.