Stocks: understanding and trading quarterly earnings
- A stock reacts to the gap between reported results and expectations, and above all to the outlook management gives.
- EPS, revenue and guidance are read together; a single number is never enough.
- Earnings often come out outside market hours: the stock can open with a gap, beyond your stop.
For a currency, the big fundamental event is the central bank. For a stock, it's the earnings release. Four times a year, every major listed company reveals its quarterly accounts. The stock can then jump or drop several percent in a single session, and when the heavyweights report, whole indices move.
What's in an earnings release
| Item | What it measures | Why it matters |
|---|---|---|
| Revenue | Total sales for the quarter | Shows whether the business is growing, hard to dress up |
| Net income | What's left after all expenses and taxes | The company's real profitability |
| EPS (earnings per share) | Net income divided by the number of shares | The figure compared with consensus first |
| Margins | The share of revenue that turns into profit | Reveals cost pressure or pricing power |
| Guidance | Management's forecasts for the coming quarters | Often what moves the stock the most |
Watch the difference between reported EPS under accounting standards (GAAP in the US) and adjusted EPS, which excludes items considered one-off. The analyst consensus is often based on adjusted EPS. Always check which figure is being discussed before calling it a surprise.
Beating or missing consensus
Just like a macro release, the market compares results with the consensus, the average of analysts' forecasts. A company beats when it does better and misses when it does worse. But EPS above expectations doesn't guarantee the stock goes up.
Many companies routinely beat consensus by a small margin. The market ends up expecting it: a small positive surprise is no longer enough. What really counts is the combination of EPS, revenue and above all guidance. A company that beats its targets but cuts its full-year outlook can see its stock fall.
- Adjusted EPS, consensus
- $2.10
- Adjusted EPS, actual
- $2.25
- Revenue, consensus
- $48.0 billion
- Revenue, actual
- $47.6 billion
- Full-year guidance
- lowered
- Likely reaction
- the stock falls despite EPS $0.15 above expectations
Made-up company and figures. Revenue below expectations and lower guidance outweigh the EPS beat.
The earnings call with analysts, usually held right after the release, can also move the stock. Executives comment on demand, costs and order books. A cautious tone about the current quarter is sometimes enough to reverse a positive first reaction, just as a central bank press conference can reverse the effect of the statement.
The P/E ratio: valuation
The P/E ratio (price-to-earnings) shows how much the market pays for one dollar or euro of profit. A stock at $150 with annual EPS of $6 has a P/E of 25: investors are paying 25 times annual earnings.
A high P/E means the market expects strong future growth. It's also a risk: the higher the expectations, the harsher the punishment for a disappointment. An expensively valued company that announces a slowdown can lose a big chunk of its value in one session. Conversely, a low-P/E stock can react strongly to a good surprise. Always compare the P/E with its sector and with the company's own history.
Earnings season
Releases are bunched into a few weeks after the end of each quarter. In the US, the season traditionally kicks off around mid-January, mid-April, mid-July and mid-October, with the big banks. The large tech names follow a few weeks later, and their weight in the indices turns their results into market-wide events.
US companies usually report before the open or after the close of Wall Street, which runs from 9:30 a.m. to 4:00 p.m. New York time. In Europe, many report early in the morning, before the open. The first move therefore often happens in extended-hours trading, and the stock opens straight at a different price.
Before a release, options on the stock often get more expensive: the market is paying to protect itself against a big move. That premium gives you an idea of the size of the expected move. After the release, it fades quickly, whether the stock rises or falls.
The impact on indices
The S&P 500, the Nasdaq and the DAX are weighted by market capitalisation: the largest companies weigh far more than the small ones. Results from a tech giant can therefore move the whole Nasdaq after the close. For the DAX, releases from the big German industrial and financial groups play the same role.
Beyond individual numbers, earnings season gives a picture of corporate health. If most companies raise their guidance, the market reads it as a sign of growth, which supports indices and risk-on currencies.
Safety rules
- Check the release date and time for every stock you hold or trade.
- Remember that a stop doesn't protect you from a gap: at the open, your order is filled at the first available price.
- Reduce your size before a release, or wait for the reaction in the first session.
- Read the guidance and management's commentary, not just EPS.
- On share CFDs, retail leverage is capped at 5:1 in the EU, the UK and Australia, which leaves little room against a gap of several percent.
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0 / 3Educational content, not investment advice. Leveraged trading carries a high risk of losing money rapidly: most retail investor accounts lose money on these products.