Key takeaways
- Public companies are required to file financial reports quarterly
- The time when companies file their reports is called earnings season
- Before financial reports are filed, Wall street analysts have expectations about what those reports will say
- Stocks can rise or fall rapidly in the short-term if financial reports don’t match analysts’ expectations
- While earnings season is a big event for media and Wall Street analysts and may cause stock prices to move in the short-term, it has little impact on long-term investment returns
Publicly held companies — that is, companies that make shares of stock available to be owned by the public — are required by the Securities and Exchange Commission (SEC) to report their financial results after the end of each calendar quarter. This is commonly called "earnings season."
The SEC requires this as a way to create transparency and to allow investors to have a clear view of how a company performed during the quarter.
During earnings season, companies report their most recent results, discuss expectations for their business during the next quarter, hold conference calls with Wall Street analysts, and even schedule interviews with the media to discuss the company, their business results, and the broader economic environment.
What do companies report during earnings season?
Typically, these quarterly financial statements include but aren’t limited to:
- Company earnings
- Profits and losses
- Balance sheets with assets and liabilities
- Legal proceedings (if any)
- Analysis of the company’s financial condition
Company executives also discuss their outlook, or their expectations, for their business going forward. Much of this information is shared with Wall Street analysts on a conference call, which is why you may hear the media referring to news that “broke during the call.”
When is earnings season?
Earnings season takes place over several weeks following the close of the previous calendar quarter, which means there are four earning seasons every year. Companies typically have 45 days from the end of the quarter to report their financial information and earnings. For the first quarter of the year, which ends on March 31, earnings season runs roughly from mid-April to mid-May. Companies follow a similar schedule the rest of the year.
For a more exact date, check any major finance website or your brokerage account for the company’s earnings calendar.
For the first three quarters of the year, companies will file (and investors or anyone else can access) a form called a 10-Q (the Q stands for quarterly). For the fourth quarter, companies must file form 10-K, which is an annual report for the company and their financials from the prior year.
What does earnings season mean for investors?
You might think that if a company reports an increase in profits during earnings season, its stock will rise as well. In the short-term, the impact of earnings season isn’t so simple. How investors and stock prices react to earnings season is based on three factors:
- The company’s prediction of what it believes its earnings will be in the quarter ahead, which is called guidance.
- What Wall Street analysts have predicted a firm will achieve, such as the number of new customers, earnings, etc., which are called estimates.
- How the financial information the company then reports compares to the analysts’ estimates.
Stock prices can be more volatile
Meeting or beating estimates is generally considered a good thing and often has a positive effect on a company’s stock price. Failing to meet expectations, often called missing estimates, is generally a negative for a company’s stock price.
Stocks tend to be volatile, which means the price of a single stock or the overall market can rise or fall more than normal, during earnings season. Investors tend to pay more attention to stocks during earnings season, and companies release more news and make more major announcements that can add to volatility. When a company announces a change in its dividends or a merger or acquisition during earnings season, investors react.
Stocks also tend to move quite a bit when companies provide guidance on future profits that differs from what analysts previously expected.
In the short-term, traders will often buy or sell individual stocks during earnings season, which contributes to volatility. This doesn’t necessarily mean a stock is a good or bad investment. It simply means it’s getting a lot of attention at the time.
Investors with individual stocks can be greatly affected
Investors with individual stocks can be greatly affected in the short-term during earnings season. If a company’s earnings report is disappointing, the price can drop rapidly.
For example, when Netflix announced in April of 2022 that it had lost about 200,000 subscribers during the previous quarter, the stock price dropped by 37% in minutes.
The S&P 500 Index, which is a proxy for the stock market, was essentially flat on that same day. This shows the impact that earnings can have on one individual stock.
Companies can also see their stock prices rise or fall because of earnings reports by other companies in their sector. For example, if Microsoft’s earnings don’t meet analysts’ expectations, the price of Apple, Intel, and other tech companies may drop as well.
The bottom line is that, in the short-term, there is a lot more risk in holding only one or a few stocks, because earnings results can have a material impact on your investments.
Market expectations and earnings season
Earnings season can be boiled down to one word: expectations. If a company exceeds or misses on the expectations from the prior quarter, the stock price will move up or down based upon the results. However, the more important part of earnings season may be in the expectations that individual companies set for the future.
At the end of the day, analysts and investors care more about what a company will do in the future than what a company did in the past. After all, past returns are no guarantee of future results.
However, there is a lot more to stock prices than earnings season.
While analysts and investors do look to earnings and other financial information for investing guidance, there are other forces at play: the broader economic environment, inflation, interest rates, and even industry specific events.
If you don't have a clear understanding of how all of these conditions will affect the stock price of one individual company, it can lead to significant capital losses.
What investors need to know
Academic economists who disagree about nearly everything else are unanimous in their view that the quarterly earnings report says next to nothing about a company’s prospects beyond the next quarter.
*Source: Harvard Business Review, “The Earnings Game: Everyone Plays, Nobody Wins”
One earnings report does not make or break a company or define a stock as a good or bad investment. Investing is a long-term strategy and investors should focus on the long-term growth potential of a company and not the news about the previous quarter or the guidance that is shared about the next one.
It’s important to remember that earnings only report what happened in the past. They do not report what will happen in the future, nor can they predict the direction of the stock market or the economy. Companies, analysts, and investors alike are notoriously bad at making predictions. And because the stock market is generally forward looking, you should be careful relying on reports that share information on the past.
Final word
Most individual investors are better off diversifying and owning many companies, and not trying to pick one or two stocks that will be the winners.
When you diversify, you eliminate the risk of any one company's performance substantially impacting your investment returns. When you invest broadly via an exchange-traded fund (ETF) that tracks an index (like the S&P 500), earnings season isn’t so much about the performance of any one company as it is about the general direction of the economy and the markets.
Developing a financial plan, and one that is dynamic and evolving to meet your needs over time, and creating a risk-appropriate, well diversified, and low-cost investment strategy to support it is often the right strategy to produce the best investment outcomes over time.
