What Are Earnings and How Does It Affect Futures Contracts?

Earnings season is a term every trader, investor, analyst, and even the average consumer should be familiar with. Earnings can provide valuable insight into the state of the stock market and the global economy, market and the global economy, causing market volatility and affecting trading and monetary policies. 

But what is earnings season exactly, what do earnings reports reveal, and how can traders and investors trade during earnings season? Here’s what you need to know:

TL;DR

• Earnings season is a period when publicly traded companies release quarterly financial reports, impacting stock and Futures markets. It lasts several weeks and occurs at the end of each fiscal quarter.

• Earnings show a company's revenue, expenses, profit margins, earnings per share (EPS), and guidance.

• Earnings reports can cause stock price fluctuations, impacting market sentiment and Futures contracts.

• Futures contracts tracking major stock indices can be influenced by earnings reports, sector performance, and economic data.

What Is Earnings season?

Earnings season is an unofficial timeframe during which many publicly traded companies release their quarterly earnings reports at the end of each fiscal quarter ,and it lasts several weeks. 

What Are Earnings Reports?

An earnings report is a financial disclosure released by publicly traded companies. It offers detailed information on their financial performance over a specified period (usually quarterly).

What Do Earnings Reports Measure?

Earnings reports include updates on a company’s revenue, profit margins, net income, expenses, earnings per share (EPS), and guidance, among other measurements. 

Here’s what some of the main segments included in earnings reports mean:

• Revenue: The overall financial inflow resulting from a company's operational activities, quantified over a specific duration of time.

• Expenses: The expenditures that the company faces to sustain its operations, encompassing operating expenses, cost of goods sold, and other miscellaneous costs.

• Profit Margins: The proportion of revenue that translates into profit once all the business-related expenses have been subtracted.

• Earnings Per Share (EPS): The profit a company has generated per outstanding share of its common stock.

• Guidance: The company's publicly disclosed forecasts and projections for its earnings in the current quarter and future periods.

• Net Income: The company's ultimate profitability once all expenses and costs have been subtracted from its total revenue.

When Do Earnings Reports Get Published?

Most publicly traded companies follow the standard calendar, with the ends of their financial quarters coming at the end of March, June, September, and December. Approximately one week to ten days later, the companies release their reports.

What to Consider During Earnings Season 

Earnings season can act as a double-edged sword. While earnings season can have the potential to shift the trend of an entire sector, sometimes it can have little effect. For example, even if an entire sector dips during earnings season, that does not necessarily mean the shares of a company you are following will dip. Nonetheless, there are a few aspects you can take into consideration when trading during the earnings season.

Companies’ News and Recent Updates

Before deciding to trade on a particular share or Equity Index, traders may review recent company news. Was there a recent press release during the quarter? Were there any upticks in positive reporting? Did the company have any scandals that may affect its reputation?

These can all give some ideas on what the upcoming report may say.

Historical data

Looking at a share's price movements from the previous year, half, and quarter may give insight into how traders will react to whatever the upcoming earnings report says. If a company’s earnings report showed growth a year before, but its price dipped anyway, you can attempt to find the reasoning behind this. If a company’s revenue decreased but its share prices rose, you can find out why traders felt optimistic.

Past performance is not indicative of future performance. Yet, it is still something to consider.

Expect the unexpected

While the aforementioned factors can be considered during earnings season, you should still expect the unexpected when it comes to the market, which is known for its volatility andsometimes, share prices rise and fall without a clear underlying reason.

What Are Earnings Calls?

During earnings season, publicly traded companies host “earnings calls” where the public (investors, traders, and analysts) can listen to the companies' financial data and statements. Publicly traded companies host conferences whereby the public (investors, traders, and analysts) can join in and listen to the companies' financial data and statements. These conferences are called “Earnings Calls.”

Why Are Earnings Reports Important to Traders and Investors?

Earnings reports are important to traders, investors, and analysts as they can provide valuable information about companies and how they have fared in the quarters in question. Here are some of the reasons why earnings season should interest market participants:

• Earnings reflect a company’s health: One of the main reasons earnings are considered important is that they reflect a company’s financial health. In other words, they show how well or badly a company has performed. This may be especially interesting for traders and investors who want to benefit from a company’s stock price swings. This also means that earnings can directly affect investors' and traders’ decisions, which would, in turn, affect the company’s stock performance. 

• It affects stakeholders’ net income: Since companies’ dividends are distributed to shareholders in accordance with their net income if a company reports below-average earnings, it can affect stakeholders’ profits and equity as well. 

• It can lead to market volatility: earnings reports can send ripples across the markets and cause volatility, which, in turn, can affect both the stock market and the economy. 

• It can affect market analysis. Earnings serve as important data points for analysts, as they can use them to assess a company’s past and future performance.

How Can Earnings Season Affect Futures Contracts?

Earnings season can affect the prices of some Futures contracts, like Equity Index Futures, which track the price changes of stock indices like the S&P 500, the tech-heavy Nasdaq, and the Dow Jones Industrial Average. 

These indices track the performance of companies from various sectors. As such, the financial earnings of these companies can affect index prices and, in turn, Equity Index Futures prices. 

Trading Equity Index Futures During earnings season 

Equity index Futures are contracts that track the performance of stock market indices like the S&P 500, NASDAQ-100, or Dow Jones Industrial Average. Trading these Futures during earnings season requires a strategic approach to capture broader market movements influenced by earnings reports and economic data. Here's how to navigate this period:

1. Understand the Broader Market Impact: Unlike individual stocks, equity index Futures reflect the overall performance of a group of stocks within an index. Earnings reports from major companies within an index can drive market sentiment, which will be reflected in the Futures market. For example, strong earnings from key tech companies like Apple or Microsoft can lift the NASDAQ-100 index, whereas disappointing results from major financials can drag down the S&P 500.

2. Monitor Sector Performance: earnings season often reveals sector-wide trends that affect index Futures. A strong earnings season for the tech sector might drive the NASDAQ-100 Futures up, while weaker earnings in energy or financials could drag the S&P 500 down. Be aware of which sectors are reporting earnings and how they may influence the broader market.

3. Track Economic Data and News: Economic data such as GDP growth, inflation reports, and interest rate decisions also play a significant role during earnings season. Index Futures can be highly sensitive to these data points, which can either amplify or counteract the impact of earnings reports. Ensure you stay updated on economic calendars to anticipate how the data could shift market sentiment.

4. Use Technical Analysis for Timing: Equity index Futures tend to be volatile during the earnings season due to rapid shifts in sentiment. Technical analysis can help identify key support and resistance levels in the Futures charts, giving you a clearer idea of entry and exit points. Look for patterns that align with the overall earnings sentiment.

5. Develop a Risk Management Plan: Given the potential for volatility, managing risk is crucial. Equity index Futures can experience significant swings in price during earnings announcements, so ensure you have a stop-loss in place or a clear strategy for exiting trades if the market moves against you. It's also important to size your positions appropriately to avoid large losses.

6. Consider Market Sentiment and Volatility: During earnings season, market sentiment can be unpredictable. A single earnings miss or surprise beat can cause large moves in equity indices. Volatility is high, and therefore, trading strategies like short-term scalping, straddles (buying both calls and puts), or trend-following can be effective in capturing market moves.

Conclusion

When trading Equity Index Futures during earnings season, you should pay attention to the earnings results of major companies, sector performance, and economic data. Combine this with technical analysis to time your trades effectively, and always implement strong risk management strategies to navigate the volatility that can come with this period.    

FAQs:

What is earnings season?

Earnings season is a period when many publicly traded companies release their quarterly earnings reports, influencing stock market activity and Futures trading.

What do earnings reports include?

Earnings reports provide data on a company's revenue, expenses, profit margins, net income, earnings per share (EPS), and future guidance.

How do earnings reports affect markets?

They can cause stock price fluctuations, impacting market sentiment and Futures contracts. Positive or negative reports can trigger significant market movement.

Why are earnings calls important?

Earnings calls allow investors, analysts, and traders to listen to a company’s financial results and future outlook, influencing stock prices and market sentiment.

How can I trade during earnings season?

Monitor sector performance, news, and historical data. Use technical analysis to identify trends and manage risk due to high volatility.

What are Equity Index Futures?

These are contracts that track stock indices like the S&P 500 or NASDAQ-100. They reflect overall market performance, which is influenced by earnings season.

How can earnings season impact Futures contracts?

Earnings reports from major companies within indices can drive sentiment, affecting Futures prices like Equity Index Futures (S&P 500, NASDAQ-100, etc.).