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MCF Insights: Beware of Big Moves During Earnings Season

Because stock prices can rise and fall quickly on the emotions of traders

Earnings season is under way for the second quarter. Don’t be surprised to see sudden stock price moves when companies report. But that doesn’t mean you should respond to every twitch. 

Each quarter, public companies open their books and disclose to the world how they performed during the past three months. It can be a time of great stress and great jubilation for shareholders. The move in the company’s share price following an earnings announcement often stems from whether the company beats or misses the expectations set by Wall Street. 

Big Moves During Earnings Season 

During earnings season, volatility often ramps up. Individual stocks can have some of their biggest moves of the year on the days they report. 

Take Alphabet for example – Google’s parent company. Shares rose 9% in extended trading after the tech giant reported second-quarter earnings results that beat expectations set by Wall Street. In fact, Alphabet reported adjusted earnings per share of $14.21 on revenue of $38.94 billion, versus the $11.30 earnings per share on revenue of $38.15 billion that Wall Street expected. 1

Or Starbucks jumping nearly 6% after beating expectations.2 Or Tesla dropping 10% after posting larger than expected losses and missing consensus earnings.3 Or Netflix dropping 10% as their earnings report showed a huge decline in new subscribers. 4

Don’t Try to Time the Market

Of course, wise investors have an investment plan and stick to it, regardless of market gyrations. Hopping in and out of the market and chasing hot stocks is seldom a good idea. The best market days are when you make most of your money, which means you need to be in it to win it. 

Standard & Poor’s finds that, for the 20 years ended last December 31st, someone who stayed fully invested in the S&P 500 index had a 7.8% annual total return. But an investor who missed the 10 best days got only 4.2% and missing the 20 best days meant a mere 1.7%. 5

That’s why it pays to find good companies, and you do that with the help of earnings reports. However, remember that a stock’s movement can vary widely from the fundamentals of a company, rising and falling on the emotions of traders. 

Earnings are Very Important Long-Term

Every few months, top executives often have a conference call to discuss how their company performed, what they did a good job on and where they struggled. Many investors focus on what the company says about future prospects, and any anecdotal information executives provide about the economy. 

Companies more sensitive to economic shifts are viewed as bellwethers for the overall economy, and in turn the market. Fortunes can be lost and made on the earnings announcements – no matter if the company is big or small, or whether it is in the financial, industrial or retail industry.  

Further, transparency is very important to investors. That’s why, by law, publicly traded companies must report their financial data and any material events, and the information must be accurate. So, it usually is a massive red flag when a company hides information from investors or uses tricky accounting procedures to make it appear they made a profit. 

A company’s financial information can appear dauntingly complex, but for many investors it’s the key piece to making their investment decisions. Just don’t try to time the markets – take a long-term view.

Contact a MCF Consultant to discuss your financial plan and how this information can help you.

MCF has published this article with permission from Financial Media Exchange.

1 https://www.cnbc.com/2019/07/25/alphabet-q2-2019-earnings.html

2 https://www.cnbc.com/2019/07/25/starbucks-earnings-q3-2019.html





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