Navigating the Market During Earnings Season

October gets us into the heart of football season where we can begin to see which teams are looking like the best ones this year. It is also an important month in the investment world because October is the beginning of the third quarter earnings season. Most publicly traded companies will report their third quarter earnings beginning in October and spanning the final quarter of the year.

Earnings Reports

Each earnings season companies report their earnings for the most recent quarter. Many analysts, advisors and others have expectations for what companies will be reporting. If a company’s earnings report shows earnings that are well outside the range of expectations, this could impact the stock price of the company in one of two ways: a positive way if reported earnings are above expectations, and a negative way if they are lower than expected.

In some cases, an earnings miss by a major influential company can impact not only the price of that company’s shares, but those of that company’s industry or sector and in some cases the entire stock market. Some analysts and investors might take this as a sign of a bigger trend in the markets. The same holds true if a major, influential company reports earnings that exceed expectations.

This earnings season has factors that could contribute to market volatility in addition to any company’s reported earnings being above or below expectations. There is the issue of Fed rate cuts into the future. The November election is coming up. There are fears of a potential recession.

Sector Specific Issues

Leading into this earnings season, earnings revisions prior to the start of this quarter’s earnings season have been largely negative. This decline has been larger than the revisions leading into the prior two quarters. ?

These downward revisions have not been concentrated in any particular industry or sector. The technology and finance sectors have been largely immune from these downward revisions, while the transportation and energy sectors have been among the hardest hit by this trend. Energy companies’ earnings are under pressure due to declining energy prices. Transportation companies are feeling the effects of softening demand.

Though the financial sector has not been hit by downward earnings revisions, earnings estimates for many large banks are for lower earnings than in previous quarters due to lower loan demand and pressure on interest rates.1

Opportunities and Risks

This earnings season, like all quarterly earnings seasons, comes with its share of potential opportunities and risks.

If an investor can identify a company whose stock seems undervalued and who is likely to report higher than expected earnings for the quarter, this might present an opportunity to realize some nice short-term gains if indeed the company does report higher than expected earnings. However, if this positive earnings surprise does not materialize, the stock price could stay the same or even decline a bit.

Likewise, an investor might identify a stock where they expect the company to report lower earnings. If this is a stock they already own, they might sell the shares to avoid the expected downturn from lower reported earnings. If this does materialize, they might avoid a loss in value from a lower stock price. However, if these lower earnings do not materialize or if the company’s fortunes look promising, the stock price could rise instead depriving the investor of possible future gains.

In general, investors who speculate in short-term increases or declines in a company’s earnings will often find themselves making a poor bet if they invest in a stock solely for this reason. Individual investors are generally better off taking a long-term view and investing in a company because they believe in the company’s long-term growth potential.

In fact, investors are generally better off having a long-term investment strategy that includes an asset allocation for their overall portfolio. In the case of stocks, holding companies who are leaders in their industries and who have solid balance sheets and solid growth prospects is a good strategy for most investors. They might also use mutual funds and ETFs as appropriate to round out their asset allocation.

Need help with your long-term investing strategy? Contact a Wedbush financial advisor to discuss the possible impact of third quarter earnings on your portfolio and how you can build a solid portfolio that aligns with your investment goals, risk tolerance and investing time horizon.

1: Nasdaq

Disclosure?

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