Breaking Down The Importance Of Earnings Season

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Imagine that, once every few months, you must release information detailing your current financial standing. The public can see where you’ve spent money, made money, or even how much you’ve saved.

Sounds intimidating, right?

That’s just a different way of describing what earnings season is.

The period is undoubtedly hectic for market participants, with companies finally revealing what’s transpired behind closed doors.

And on top of being hectic, it’s impossible to understate the importance of the period. For those wondering why it’s so critical, let’s look at a few reasons that help explain its significance.

Critical Business Updates

Earnings reports provide market participants with a plethora of information, including revenues, expenses, and profits, to name a few.

For example, Valero Energy (VLO - Free Report), one of the largest independent petroleum refiners, delivered a very positive release, benefiting significantly from a favorable refining environment.

Adjusted earnings totaled $23.90 per share, comfortably exceeding the Zacks Consensus EPS estimate of $21.23 and climbing more than 550% YoY. Revenues of roughly $46.1 billion also exceeded the Zacks Consensus estimate of $38.8 billion, reflecting a beat of nearly 19%.

VLO posted record quarterly profit, with net income reaching $6.8 billion compared to $1.1 billion in the year-ago period. The stock sports a favorable Zacks Rank #1 (Strong Buy), with its earnings outlook benefiting heavily from positive revisions over recent months.

Image Source: Zacks Investment Research

Share Price Impact

A company’s quarterly earnings report commonly impacts its stock price, a theme that market participants have undoubtedly noticed. Typically, we’ll see bullish share movement post-earnings from companies that surprise positively or raise their guidance, reflecting healthy underlying business.

It’s worth noting that implementing a stop-loss at a comfortable threshold will help limit spooky post-earnings price swings, preserving precious capital.

Highlights Current Trends

Earnings season can also provide a big-picture view of overall trends within the economy or industries. For a simple example, if many retail companies fall short of expectations, it could be a sign of a slowing consumer or economy, which has knock-on effects across the market.

Conversely, if many retail companies report stronger-than-expected earnings, it may signal that the economy is moving along just fine, underpinned by a healthy consumer.

Bottom Line

While earnings season is undeniably hectic for everyone involved, that’s just the nature of the period.

It’s important for investors to understand why it matters for many reasons, including providing investors with an updated financial standing, the volatile post-earnings share swings, and the overall picture it provides on market and broader trends.