3 Reasons Why Earnings Season Rocks

Imagine that, once every few months, you must release information detailing your current financial standing. The public can see where you’ve spent money, made money, or even how much you’ve saved.

Sounds intimidating, right?

That’s just a different way of describing what earnings season is.

The period is undoubtedly hectic for market participants, with companies finally revealing what’s transpired behind closed doors.

And on top of being hectic, it’s impossible to understate the importance of the period. For those wondering why it’s so critical, let’s look at a few reasons that help explain its significance.

1. Critical Business Updates

Earnings reports provide market participants with a plethora of information, including revenues, expenses, and profits, just to provide a few simple examples.

Take, for example, Palantir PLTR, which recently upped its current year revenue growth guidance, causing shares to soar post-earnings. PLTR has communicated that it’s been enjoying healthy demand thanks to the AI frenzy, reflected by the guidance upgrade.

Analysts accordingly adjusted their current year sales expectations following the guidance upgrade, with the company now forecasted to see 35% YoY revenue growth.

2. Share Price Impact

A company’s quarterly earnings report commonly impacts its stock price, a theme that market participants have undoubtedly noticed. Typically, we’ll see bullish share movement post-earnings from companies that surprise positively or raise their guidance, reflecting healthy underlying business.

Netflix NFLX saw its shares soar following its latest quarterly print, with the company crushing on subscriber metrics while also posting 25% EPS growth on the back of 12% higher sales. As shown below, shares have soared following back-to-back releases.

It’s worth noting that implementing a stop-loss at a comfortable threshold will help limit spooky post-earnings price swings, preserving precious capital.

3. Highlights Current Trends

Earnings season can also provide a big-picture view of overall trends within the economy or industries. For a simple example, if many retail companies fall short of expectations, it could be a sign of a slowing consumer or economy, which has knock-on effects across the market.

Conversely, if many retail companies report stronger-than-expected earnings, it may signal that the economy is moving along just fine, underpinned by a healthy consumer.

It also allows investors to position themselves appropriately. For example, Newmont NEM, one of the world's largest producers of gold, has benefited significantly from the rise in gold, which was reflected in its latest quarterly print.

The average gold price per oz reached $2,643 throughout Newmont’s latest period, melting higher from the $2,004 mark in the same period last year. Free cash flow of $1.6 billion throughout the period was the company’s highest read ever.

Analysts have raised their EPS expectations across the board amid the favorable operating environment, landing the stock into a favorable Zacks Rank #2 (Buy). Shares overall reflect a great way to obtain exposure to the recent run in gold.

Bottom Line

While earnings season is undeniably hectic for everyone involved, that’s just the nature of the period.

It’s important for investors to understand why it matters for many reasons, including providing investors with an updated financial standing, the volatile post-earnings share swings, and the overall picture it provides on market and broader trends.

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This article originally published on Zacks Investment Research (zacks.com).

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