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US Earnings Season: What it is, How it Works, Why is it important

Another batch of fresh earnings results have passed and it is not always easy to keep track. Tune in this week as we run through some of the winners and losers of the most recent earnings season in the US stock market.


The Driving Factors of Earnings

One might think that the earnings results pertain purely to how the company has performed over the last period, in the US being the last quarter. The reality however is quite different where we have analyst estimates, the earnings results themselves, and the guidance provided by the company for future projections. Host Andrew Baxter explains that while all of these components are important, the guidance is the most important in his view. Some reasoning for that is if you look at consensus estimates, the most widely agreed upon estimates of what a business’ earnings might look like among analysts, these can very often be inaccurate in comparison to the actual results posted by the company when the time comes. The nature of financial analysis and financial analysts, there is a lot of uniformity in the estimates they tend to come out with which can cause some big discrepancies. A difference between the earnings and the actual result can lead to some fairly volatile moves, but if earnings outperform consensus but then the guidance is negative, this may very well overrule both of these factors. 


A Wrap of Recent Earnings

Prior to the recent earnings season, the S&P 500 had estimates of coming in with an earnings contraction of about 7%. The result in the end was negative earnings growth of about 4%. Despite still being negative, the S&P 500 still outperformed expectations overall and on an individual level, over 70% of companies outperformed analyst estimates in their earnings reports. Host Andrew Baxter notes that despite companies reporting negative earnings growth, the sentiment surrounding the earnings season as a whole was that it was successful simply because estimates were well-beaten overall. Guidance was also largely weak overall, however we have still seen oddly positive reactions from the market on the back of the recent earnings. When forecasted and realised earnings growth is not keeping up with earnings multiples, eventually the business will be overvalued and in a position vulnerable to a potential correction which will hurt if you are an investor.


Notable Mentions

Over the strong first half of the year we have seen in markets along with some strong earnings in the recent window, there are some notable companies worth looking at. Nvidia is one of the major names which is up well over 200% for the year so far and despite some pretty lofty expectations, Nvidia still managed to crush expectations on its earnings date. Host Andrew Baxter explains that its involvement in AI not only brought some major hype to the company, but has also greatly improved the company’s performance and helped it achieve some great earnings. Another interesting story out of their recent earnings result is Abercrombie  & Fitch, a clothing brand which crushed their earnings by over 700% on the back of some weak earnings expectations. The trap investors can fall into is thinking that momentum from one strong earnings result can carry a stock forever, but sometimes it can be a one off factor or stroke of luck for a business that keeps its earnings afloat for just a short period before things turn south. Whether this is the case with Abercrombie & Fitch or not remains to be seen but for retail stocks ANF certainly performed well. Apple, one of the megatitans of the US market also performed nicely although quite muted, showing the bellwethers of the market have also held up quite nicely in what should be tough conditions.


Strategies for Earnings

One strategy you can use in earnings season is a straddle which effectively operates as a bet each way. In essence, all you really need to see with a straddle is a large variation between earnings estimates and expected results and a big move either way can lead to some potentially hefty gains. There is also plenty of data available to provide some potential trades based on previous price action in the lead up to an earnings dates where you can shape a strategy to fit your view. Overall, as interesting as it is to simply talk about earnings results, there is value in understanding how you can potentially take advantage of what goes along with it.

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