Earnings Reports And Their Influence On Index Stock Futures

Two weeks after the beginning of every quarter (January, March, June, September) starts a period where public companies (those traded on the major exchanges) must report their earnings results to the public at large. 

During this period, an army of Wall Street analysts spend most of their time trying to figure out what earnings the companies will report, or if they are not profitable, what type of revenues they’ve generated. Once they’ve concluded their analysis, they will write a report and issue it to their clients with a recommendation to either buy, sell, or hold a stock.

Since there are many analysts dissecting the same stock, a general consensus forms as to what the most likely earnings scenario will be for each company. Then, on the day the company releases their earnings report, traders will react to the actual numbers. If a stock misses the estimate, the knee-jerk reaction is to sell the shares en masse. If the earnings exceed expectations then the opposite occurs. This ritual happens every earnings season on Wall Street.

If you are a futures trader involved in trading one of the broad indexes such as the S&P 500, Nasdaq 100, Dow 30, or Russell 2000, it is vitally important that you understand the influence of some of these big bellwether stocks on the movement of the underlying index. This is especially true during earnings seasons as the reaction immediately following the release of an earnings report will cause a spike in volatility.

This spike could be perceived as added risk or offer great opportunity, depending on your level of skill and discipline.

In the last couple of weeks, many of these high profile stocks have reported earnings, and indeed have added additional volatility to the underlying indexes.

One such example was in the Nasdaq 100 E-mini futures contract. On Thursday, July 18th, soon after the stock market closed in New York (4:00 pm EST) Microsoft (a big bellwether stock) reported strong earnings (above the consensus). As a result, the stock rallied sharply in after-hours trading causing the Nasdaq E-mini futures contract to follow suit. As seen in the chart below.

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