What You Should Know About Earnings Season | Erik Averill, Brandon Averill | AWM Insights #18
Episode Notes
As you see in the major media and financial publications, earnings season is coming soon, but what does that mean for the typical investor? Articles and TV segments abound with the results and guidance of some of the best analysts in the business on their predictions of how some of the top companies are doing, but does that mean that you should be acting on those claims?
Put simply, “earnings season” is the time in which most of the major publicly traded companies release their quarterly earnings reports. As a result of these reports, more updated information is then available to the public followed by market adjustments. What makes this upcoming earnings season of particular interest for many is the fact that it’s following the best quarter since 1987.
In this week’s episode, Brandon and Erik discuss earnings season and cover topics and questions like:
What exactly is earnings season and why do people get excited about it?
How earnings season can highlight the difference between the stock market and the economy (for more on this, see episode 11: Stock Market vs Economy)
How and why earnings season causes market adjustments
Why some of the best analysts in the world still can’t predict future outcomes based on earnings season information
What should I know about earnings season? Should I take any steps to prepare or react to it?
What’s the best way to secure long-term, positive financial results?
+ Read the Transcript
Erik Averill (00:00):
Hey, everyone. Welcome back to AWM Insights, where we cover all things investing. Along the way we will debunk the lies sold by Wall Street, the myths of the cocktail party stock tips, and of course provide you with the latest evidence backed insights to help you capture the returns that you deserve. Brandon, what I want to jump into this week is earning season is coming and I actually don't think most people even know what earning season is. It's something that we see on CNBC and across the Wall Street Journal and a lot of these financial publications that this is supposed to be some big moment and some big excitement. And my question for you is, as an investor, what is earning season and what should I do about it?
Brandon Averill (00:45):
That's a great question, Erik. I mean, earning season really is quite simply when companies report their earnings for the quarter. So at the end of each quarter, financials are produced and people report on how the quarter went previously. Typically, they also give some guidance about what their expectations are for future earnings. So really what it all boils down to is it's additional information for the market, and this information, as we know, it's when it becomes public. So it's when everybody gains access to it. And so that's really what earning season is. I think the question that could be a good followup is, what should we do about it? Is the information we get from earning season tradable? And I think we're going to see a really good example of this.
Brandon Averill (01:30):
We just finished up the best quarter since 1987 from a stock market perspective, but 80% of S%P 500 companies haven't even given us guidance on what to expect from earnings. So basically what that tells us is that we're not as a market trading on any expectations from earnings and thus it's really difficult. You're basically trying to predict the future again, and as we know, that's not a very successful way to go about investing longterm.
Erik Averill (02:01):
Yeah, it reminds me just the comment you made that here we are the best quarter since 1987. It's really the disconnect of stock market returns in the economy, which we had covered on an earlier podcast. One of the things I just have a question around. You see these analysts come out and set earnings guidance, and it's this big thing that these are analysts that spend 40 hours a week on that one specific company pouring over every single little detail that's publicly available, and very rarely, if ever, do they hit the exact earnings price or the earnings report. Can you maybe talk what that tells us about how difficult it is to predict prices when we see the best analysts on Wall Street missing guidance and what we're supposed to do with that?
Brandon Averill (02:57):
I mean, like you said, Erik, coming up with projections is just incredibly difficult, even for people that are within the company and have information that's not available to the public to come up with guidance of what the future is. I think that points to why 80% of the 500 largest companies in the world haven't given guidance because it's very difficult. We know this as business owners as we look ahead and try to predict or project what our earnings are going to be internally. It's based on a bunch of assumptions, it's based on educated guesses that we're putting forth, but we could be wrong. And so I think that's where it becomes really interesting. If the companies are basically saying, "Hey, we don't know about the future," I would find it hard pressed to put a lot of faith in an analyst that's going to say, "Hey, I have a pretty good idea on what's going to happen with a company," especially if that company can't project it itself.
Brandon Averill (03:55):
So I think it goes back, we're going to get a ton of information when earnings do come out. That's great, and we'll see markets adjust. Right now I think general sentiment is that we're going to have a tough earnings season just given everything that's going on in the world right now and that we're challenged with. But if earnings come out better than that general consensus for a company, it's probably going to rally or vice versa, and that doesn't always hold true. There could be a company that comes out with earnings that is greater than what we all expect them to do but we look at it and they give us some future guidance they think they might be impacted, the stock might Fall. So we'll see rapid changes based on the information that becomes available. Again, it just goes back to, can we trade upon that? And there is no reliable way to trade upon that information in our view.
Erik Averill (04:48):
Yeah. I actually think of something else that's helpful to share with the audience is, on one of our other podcasts, the Athlete CEO Podcast, we've had the privilege to interview one of the Chief Marketing Officers of Facebook or the CEO of Trinity Capital, a publicly traded company. And the thing is they have to be very, very careful of any information that they actually do have that could materially impact the price of their publicly traded stock. And there's restrictions on these key employees. There's restrictions on the officers of the company because that's called insider information and if that gets leaked and somebody trades on it, they actually go to jail. And so even the desire in this wanting to have access to the special information to be able to trade a company, to get higher expected returns than somebody else, just does not exist in the public markets and it's one of the reasons we rail against picking individual equities in the public markets.
Erik Averill (05:50):
You're much better doing that in the private markets where there is asymmetry of information. And so the one thing I do think we can take away from earnings or just what's been going on in the economy is adjusting our expectations of what future returns could look like. I think it's adjusting saying that there are periods when we aren't going to see the annualized 10% returns of the S&P 500. And so what we have to do is have a plan in place. We need to increase our savings. We need to check really our personal finances and hopefully be surprised to the upside. But just really goes back to having a plan of staying focused, controlling what you can control. And so we appreciate your guys' attention on this. Every week it's been a fun conversation, the feedback that we're getting. Of course, you can find the show notes for this specific episode at awminsights.com. We'd love to hear from you. If there's something you'd like us to cover, please reach out, let us know. And until next time, stay humble, stay hungry, and always be a pro.
Want more AWM Insights? Subscribe below!