Time to kick off corporate earnings season
The corporate earnings season kicks off this week! For Wall Street and many in the business community, this time is just as thrilling as the kickoff to the NFL playoff race -- minus the wings and beer. Investors watch attentively as each company releases its financial statistics from the previous fiscal quarter. As investors, it's important that you also get in on the excitement by learning how earnings season works and why earnings matter to you.
Earnings season happens 4X per year
During an earnings season, which occurs immediately following the end of each fiscal quarter, companies report an assortment of financial data from the previous three months. This includes important information such as the company’s revenue and profitability, the competitive landscape, product updates, or anything else that might affect the business or the stock price. Just like post-game interviews -- this is also an opportunity for investors to ask questions of the company's management team.
Sometimes it pays to be the underdog
There can be a difference between what investors expect and what companies actually report. If the companies “beat” expectations, this often results in higher stock prices. If companies “miss” expectations, stock prices can fall.
Corporate earnings and stock prices go hand in hand
Corporate earnings are the true MVP when it comes to stock returns. One simple way to assess the value of a stock is to consider the growth in that company’s earnings, which usually leads to a change in valuation -- which is the process whereby the market collectively determines the current worth of a company. In other words, stock prices generally go up if corporations are more profitable, if investors are willing to pay more for that profitability, or both. Thus, the fact that the economy expands and companies become more profitable is a key reason that stock prices rise over the long run. How positive or negative corporate earnings are each quarter is viewed as one of the most important data points when determining the health of both the economy and the financial markets.
Investors cheer for profitability
The past ten years have been no exception when it comes to the relationship between corporate earnings and stock prices.. As displayed in the chart below, earnings-per-share of large US companies has grown by 170% since the bottom of the recession in 2009. Earnings growth is one of the most important reasons that stock prices also rose 280% over that same period. After all, investors hope to buy the shares of companies that have great products and services that consumers want to purchase. Let’s do the wave!
This chart shows the earnings-per-share of S&P 500 companies. Corporate profits are what drive markets in the long run.
Source: Clearnomics, Thomson Reuters
Corporate earnings help guide investors
Companies don’t (and can’t) simply report numbers blindly-- they are subject to obligations of truthfulness and full disclosure imposed by regulatory authorities. Wall Street analysts help to set investor expectations ahead of time by providing “guidance” on what they think the outcomes are likely to be. This guidance can be positive or negative depending on how the business is doing. They can then build their own roster of companies they would like to invest in.
Outlook for 2019
At the moment, across US large cap companies, many experts expect earnings to rise by 7% in 2019. Some believe that this could continue to support long-term investors who are able to properly diversify to achieve long-term financial goals. Are you ready to get in the game?