Earnings Season Is Coming: Here is What Should We Expect

The earnings season sounds like a time to make some money. Probably that is what crossed your mind in the first instance, and you are not entirely wrong. For starters, here is what the earnings season entails. Companies are required by law to periodically post information about their financial health. This information helps investors to make informed decisions. For instance, if the financial health is positive an investor is likely to increase their shareholding. Now, companies release this information at the same period in every quarter. This period is referred to as the earning season.

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Earnings Season

Earnings season is the period when publicly traded companies release the financial information report of the recent quarter, more about this can be found in this article. Usually, the companies hold conferences to report the results and answer questions from analysts. A company's performance is then compared to analysts' projections. This helps determine the actual performance of the company vis a viz how it was expected to perform.

While the earning season does not have a definite beginning and ending time, it typically starts two weeks after the end of a quarter and runs up to 6 weeks. Remember the companies have 45 days after the end of the quarter to report their financial health with the Securities and Exchange Commission (SEC). The common earning season months are January, April, July, and October.

Investors and analysts are usually eager to see how the companies perform. This can lead to massive swings if a company misses or beats expectations. As the analysts review reports of company performance, company stocks become highly volatile. It is not uncommon for the share price to jump 20%. In fact, you can experience massive swings even if the company is not in your portfolio. This is because the performance of the stock may have a ripple effect on others in the market.

2021 Third Quarter

The third quarter has just come to an end. It runs from July through September officially ending on September 31st. But fiscal quarters of some retailers end a month later. The Q3 earnings season is set to start and will run from mid-October to November. Usually, Alcoa, a major aluminum producer, is the first company to release its earnings, kicking off the earnings season.

JP Morgan and other banks are set to release the quarterly results on October 13th officially opening the Q3 earning season. However, the reporting season is already in progress after Oracle (ORCL) kick-started the cycle. It released its Q3 earnings ending in August. Six other S&P companies have also released their reports including Lennar, FedEx, and Adobe. NIKE and other S&P companies with fiscal quarters ending in August will also be releasing their results. About two dozen companies will have released their results by the time big banks like JP Morgan start their reporting.

2021 Q3 Earning Season Expectations

The earnings outlook remains positive with steady growth. S&P 500 third-quarter earnings are expected to increase 26% from the same period last year and 13.8% on higher returns. It would follow the learning growth of 94.9% on 25.2% higher revenue in the second quarter. The earnings for small-cap S&P 600 are expected to increase 43.1%. This is a great number although the figure in the past two months can't be overlooked. The expected figure has fallen compared to the high of 28.10%, a fall of 50 basis points. This could be interpreted as a deteriorating sentiment of analysts.

While the third-quarter earnings are expected to be positive, it doesn't seem as strong as the first and second quarters. Perhaps this shows that analysts' concern goes beyond the Covid 19 delta variant. It is a scenario that will attract more concerts going forward.  According to Zacks Investment Research, the net quarterly profit margins in Q3 of 2021 is +7.2% a drop from 12.4% in Q2. It is important to look at the margins outlook due to the rise of line items including inputs, logistics, and labour.

The season peak will begin on the 11th of October with double-digit estimated growth of 17.6% in the financial sector. The greatest growth is expected in the material sector at almost 100%. The growth expectations are supported by the massive demand for materials across industries. However, there is risk in the material sector including cost and availability which is part of transport and logistics calls for cautions. Some of the companies include H.B Fuller.

Staples and Discretionary consumer sectors have the worst growth expectations. However, the two consumer sectors will likely outperform the expectations. The consumer is currently strong and there's no reason to think otherwise. However, there is a caveat. Consumer companies that are US-centric businesses will perform better than those that don't. The need to rebuild the failing infrastructure in the US is massive, inevitable, and urgent. This means spending trillions of dollars. In turn, investors will make a fortune. This points at a boom in the infrastructure stocks. This means investors should be ready to buy the ideal stocks when growth potential is highest. For instance, companies set to gain the most from the projects involving energy transformation, building and repairing bridges, and roads have the potential to perform well in the future.

The Q2 had numerous positives including a very high growth rate. The total earnings broke all-time quarterly high with key sectors showing great strength. Companies in the travel, hospitality, and leisure earning are still below the pre covid 19 period. In fact, these companies might take quite a long time before they go back to pre covid profitability. Therefore, it is quite impressive that the record earnings are without these important sectors.  Well, the third quarter will likely not reflect the massive growth in the preceding two periods. Essentially, the last of quarters were compared with periods that were impacted by the covid 19 pandemic. Therefore Q3 earning comparison will be normal considering the US economy started opening in the year. It also explains the deterioration in the growth expectations compared to the preceding periods.

Analysts are expecting things to happen in quarter 3. While the robust earning expectation is expected to come again, issues of supply chain and inflation impact the outlook. Therefore, the investor worry is not earning growth but it will fail to inspire Q4 earnings. However, the market is expected to maintain positive growth. The current consensus estimates reflect the Fed's assessment that the market trend is transitionary and the covid related disruptions will eventually fade out.

Technical Outlook

The S & P market has experienced a correction reaching the 4500 level. While a rebound appears strong, it could easily retest the all-time high. If it surpassed the 4500 level the value could head North for new highs. Otherwise, failure to surpass this level could lead to another correction.

Final Word

We are just a week ok from the Q3 earnings season and every investor and analyst has their eyes on the market. Projections point to positive results in all sectors. However, Q3 results might not be as high as the preceding quarters. But the results could surprise us. In a nutshell, 2021 seems like a good year for stock investors.