With the first quarter earnings season squarely upon us, many stock pickers and investors are reconciling with expectations not met.
JP Morgan, Goldman Sachs, Citigroup, and BlackRock published their quarterly reports last Wednesday (6 April) to kick off earnings season alongside other S&P 500 members. News outlets and financial journalists have chalked these results up to a ‘mixed’ start. While many companies are beating top-line estimates, they seem to be having difficulty doing the same with consensus EPS estimates.
Zacks Investment Research’s Director of Research, Sheraz Mian, attributed this difficulty to the inability of corporate management teams to ‘fully grasp the impact of inflation and logistical bottlenecks’. Indeed, it has not been an easy quarter in the financial sector.
In the wake of Omicron, international sanctions imposed upon Russia, and the Fed tightening cycle in the US, profitability of the consumer banking business has taken a massive hit even as other key metrics such as credit card loans show a positive outlook. Banks and traders, even if not tied to the hip financially to Russia, have felt the pain in commodities as the oil and nickel markets experienced huge volatility in late February and March.
While these reports may have fallen short of investor expectations, they do offer insights into where the global economy is headed, and investors are eagerly planning their next move based on actual Q1 2022 earnings and projected Q2 2022 earnings.
Breaking down earnings reports
To those unfamiliar with earnings reports, they are published quarterly for companies to inform shareholders of their financial performance. Companies are legally required to file quarterly or annual reports in which they disclose their income, balance sheet, cash flow, and any market risks the company may be facing or will face. Management teams will discuss earnings results and the overall performance.
Certain companies and sectors are thought of as ‘bellwethers’, which means they are considered broadly representative of the health of the stock market and their quarterly performance is considered a great tell of overall business activity. Some examples include Microsoft or Apple. Many analysts and investors believe that if they are doing well, the market must also be doing well.
As it is not uncommon for these large corporations to have earnings reports of over 100 pages, investors may do well to focus on some key areas and figures. These include the company’s revenue, net income, earnings per share, and EBIT, which stands for Earnings Before Interest and Taxes. These figures should give shareholders and stock pickers insight into the company’s actual performance compared to its estimated performance and performance from the previous quarters.
How investors can react to earnings reports and season
The periods right before and after a company’s earnings report is released are usually the times its stock prices are most prone to change. Before a report’s release, people may trade based on expectations, and afterwards, depending on whether the company meets its earnings targets, people may trade based on realisations.
Observing these periods can make you a more well-rounded and informed investor, yet many financial firms also advise their clients to remember that earnings season can make stock prices especially volatile. Therefore, extra caution should be exercised, and seasoned investors avoid making long-term investment decisions based on this moment in time.
