Earnings Season Is Mostly a Big Show

The financial media gives stock earnings announcements far too much airtime. Don’t get me wrong—earnings drive stock prices over the long run. Earnings matter. But the hamster wheel of quarterly announcements is mostly just a big show. Public companies spend far too much time ensuring the data is presented to the investing public in the best light possible.

After a decade of watching earnings releases, here are a few things I’ve learned about earnings season –

1) Analysts for the major banks usually issue a “Buy, Sell, or Hold” rating on large publicly traded companies. These analysts sit on earnings announcement calls and ask management questions. Some of these questions should be challenging - however, that is rarely the case. The analysts must play nice with management to get access to good information. If an analyst at XYZ bank wants to meet face-to-face with the CEO of ABC company, he better not ask hard-hitting questions during an earnings call.

2) If the company's results are way out of line with analysts’ expectations before earnings announcements, it will start releasing bits of information to avoid a “surprise” as much as possible. Often, there will be small press releases or a quick insider signal to get the analysts up to speed prior to an earnings call.

3) Analysts consistently underestimate earnings, so the surprises are mostly to the upside. On average, companies beat earnings 74% of the time!

This coincides with the first point about analysts playing nice with management. You would expect that analysts would predict higher and higher earnings over time. But instead, they predict low earnings and allow the company to have “good news.” This pattern of underestimating earnings is so persistent that you’ll often see a stock go down after “good news” because the market already expected the result, and the good news wasn’t good enough!

A company’s earnings season result may cause short-term volatility, but over the long run, the surprises of any particular announcement are less important than slow and steady earnings growth.

Happy Planning,

Alex

This blog post is not advice. Please read disclaimers.