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The Importance of Earnings and Earnings Season

Earnings season presents unique opportunities for traders who know what to look for and how to take advantage.

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Paying attention to earnings and earnings season can be very useful to traders because in the long run, growing and consistent earnings are arguably the most important driver of individual stock performance, and by extension, the overall stock market. Many traders pay close attention to the overall tenor and tone of all announcements coming out in order to get a handle on whether companies are performing well in general and whether results are meeting, exceeding,or lagging analysts’ expectations.
If things seem to be going pretty well in terms of how the majority of companies—especially the established market leaders—are growing their sales and earnings, traders tend to feel confident regarding the future market prospects. On the other side of the coin, when earnings are trending below expectations it can be a warning sign of potential trouble ahead.

When is Earning Season?

The phrase “earnings season” refers to the period that lasts several weeks and occurs four times per year, during which the vast majority of U.S. corporations report their quarterly sales and earnings. Earnings season is generally regarded as the months immediately following the quarter-ends of the year. As a result, an earnings season is usually thought of as a period of several weeks starting in January, April, July and October.

Three Important Aspects to Earnings Season

There are three important aspects to earnings that traders look for during earnings season:

1. Earnings Surprises

An earnings “surprise” for a given company can be roughly defined as an earnings announcement that reports results significantly better or worse than analysts who follow that particular company had expected. An earnings surprise—be it a good surprise or a bad surprise—can have a profound impact on the performance of an individual stock, and can often propel a given stock on a meaningful uptrend or downtrend.

Earnings Surprises

What Traders Look For What Traders Look Out For
During earnings season, fundamental traders pay attention to whether the majority of earnings surprises are positive or negative. If the vast majority of earnings surprises are positive, it is generally considered to be a sign that “business is good”, and as a bullish sign for the stock market overall. A negative earnings surprise for a given company can devastate the price of that company’s stock and potentially launch a downtrend that can last for an extended period of time. When a host of companies experience this type of negative event within a few short weeks, it can spook the investing public, which can cause them to scale back their stock buying. This reduction in buying demand can weaken the stock market in the interim.

2. Bellwethers

At any given point in time, some companies and/or industries are thought of as “bellwethers” regarding the stock market and overall business activity. Throughout much of the 20th century, General Motors and IBM were typically viewed as market bellwethers. If one of these leading companies stumbled it was typically viewed as a troubling sign for the overall economy. In more recent years, companies like Microsoft and Apple have also served in this role, and other companies will do so in the future.

What Traders Look For What Traders Look Out For
The bottom line is that if companies that are thought of as leaders are performing well, it is generally considered to be a good sign for the overall economy—and by extension, the stock market—and vice versa. Anytime that bellwether stocks’ earnings surprises or overall results come in below expectations, it can serve as a warning to traders that trouble may be ahead for the stock market, and potentially for the overall economy.

3. Overall Results vs. Overall expectations

Many analysts at many financial firms spend a lot of time estimating how well a given company or industry is likely to perform in terms of generating earnings and sales. As a result, when earnings season begins, there are already many built in expectations among the investing public as to how well earnings should look overall based on these various estimates.

Overall Results vs. Overall expectations

What Traders Look For What Traders Look Out For
If the actual overall earnings results being reported are in line with or exceeding expectations, this is a sign of an improving environment for the stock market and business overall. When overall earnings can be generally described as “disappointing” during a given earnings season, it can have chilling effect on investors over at least the course of the next quarter.


Earnings and sales growth are key fundamental drivers of trader’s perceptions and stock prices in general. Many traders anticipate the period in which earnings announcements are issued by a large number of companies. These alert traders to know what to look for and understand that when it comes to the stock market, to some extent, “perception is reality.”  As a result, no matter what your trading timeframe is, for a fundamental trader it is important to pay attention to the overall trends in the earnings per share announced during earnings season as well as overall revenue growth.

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