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How to trade the US earnings season?

Earnings season

US earnings season is a key period for investors as it gives them an insight into how the companies are performing and what the outlook looks like. Most US companies report earnings quarterly to keep investors updated with their past quarter performance and provide guidance for the current and future quarters’ forecast. The typical earnings season in the US falls into January, April, July, and October. It is very important for investors to understand the key aspects of an earnings report and how it impacts an individual stock’s near-term price action and long-term trends.

The critical elements in an earnings report

The most important part of a US company’s earnings report is Earnings Per Share (EPS) growth and the yearly revenue growth, as the two elements gauge whether a business is making a profit and expanding its business.

EPS is calculated by dividing the total net income of a company by its total number of outstanding shares. This figure gives investors an idea of how much each share earns for the company. Hence, if a company's earnings per share increases over time, it means that the company is financially healthy and sustainable.

The yearly revenue growth is usually used by investors to measure if the company is making progress in selling its goods and services. It’s important to note if the figure is growing or declining compared to the same period in the previous year, as it indicates whether the company is gaining momentum in sales. It is the growth trajectory in EPS and sales revenue that are the key aspects that impact on stock’s valuation; hence, we usually focus on those year-on-year percentage changes. Below is an illustration of Tesla’s earnings report for Q1 2023.
Source: Tesla

A beat on earnings expectations usually causes a jump in the share prices, and a miss on estimates often encounters a selloff in the stocks. However, this rule does not always apply in all the earnings reports as there are other elements that impact price actions and market valuations.

Company’s core business and new developing area

Apart from the above two elements, companies’ key business development and new growth areas are also critical in an earnings report.

The core business is its main source of income, and it usually relies on the sale of goods or services, such as Apple’s iPhone sales, Netflix’s subscribers, Nvidia’s data center revenue, and Tesla’s EV delivery number. A healthy growth in core businesses implies that the company is doing well in its industry and keeping strong positions among competitors, and vice versa.

A business’ new developing area usually follows industrial trends, like Amazon and Microsoft’s cloud business, Apple’s service division, Tesla’s energy storage, and Nvidia’s AI-chip sales. However, a jumbo growth in the new areas could boost shares price in the near term, but it may also create bubbles once the heat fades off.

Company’s guidance, management change & mergers

Sometimes a company’ s guidance for future quarters may have a more significant impact on its share’s near-term price actions than its reported performance for the past quarter. Stocks may jump on positive guidance and crash on a negative outlook as the guidance implies what direction the company points to in terms of its profit and revenue growth. For example, most companies provided negative guidance in 2022 due to hefty inflation, Fed’s aggressive rate hikes, and supply chain disruptions.

Also, investors should not forget to pay attention to other aspects, such as management changes, product launches, or mergers & acquisitions, that have the potential to affect a stock’s performance. By taking all these factors into consideration, investors can make better-informed decisions about their investments during the US earnings season.

Macro influence

Macro factors could be critical as the economic influence could be a long-term impact on stock markets. This means that investors should pay attention not only to individual stock earnings reports but also to macroeconomic developments such as central banks’ monetary policy, inflation, unemployment, GDP, and manufacturing activity, which can provide clues into the direction of the overall economy.

Accommodative monetary policy, coupled with stable economic development, usually provides a bullish view on stock markets. On the flip side, central banks’ tightening measures, along with downbeat economic conditions usually pressure the share prices.

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