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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 three reasons that help explain its significance.

Critical Business Updates

Earnings reports provide market participants with a plethora of information, including revenues, expenses, and profits, just to provide a few simple examples. It’s critical for investors to receive this information, as it gives a deeper view into the business and allows them to see any potential red flags.

Meta Platforms (META - Free Report) posted adjusted EPS of $8.02 and record sales of $48.4 billion in its latest quarterly print, reflecting growth rates of 50% and 21%, respectively. Net income of $20.9 billion was the company’s highest read ever. 

Below is a chart illustrating the company’s sales on a quarterly basis.

Image Source: Zacks Investment Research

Share Price Impact

A company’s quarterly earnings report commonly impacts its stock price, a theme 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 business.

Philip Morris (PM - Free Report) shares benefited nicely from its latest set of better-than-expected results, with EPS growing 14% alongside a strong 7% move higher in sales. Demand has remained strong for the tobacco titan, with product innovations remaining key for its future.

The company has long been a favorite among income-focused investors thanks to years of consistently higher payouts.

Image Source: Zacks Investment Research

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

Earnings Season Highlights Current Trends

Earnings season can also provide a big-picture view of overall trends within the economy or industries.

It also provides insight into current business trends within industries, allowing investors to position themselves appropriately. For example, NVIDIA (NVDA - Free Report) has posted robust Data Center results as of late thanks to the AI boom. 

NVIDIA’s outlook continues to remain bullish, sporting a favorable Zacks Rank #2 (Buy).

Image Source: Zacks Investment Research

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 price swings sometimes seen post-earnings, and the overall picture it provides on market and industry trends.

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