Earnings Season Ignites Expectation In The Stock Market

The upcoming earnings season is poised for much anticipation, yet reported earnings may not align with investors’ expectations. Positive outcomes can surprisingly lead to a downturn in share price, and conversely, negative outcomes can yield positive effects on stock value.

In August, the annual reports of the companies we invest in or are interested in will be released.
Depending on your investments, you may have a lot or only a few reports to read.

The sheer amount of information might seem overwhelming, especially if the reports are hundreds of pages long.

However, there is no need to worry, as most companies also provide condensed investor presentations that highlight key details. These presentations are much shorter and quicker to read, serving as a helpful overview.

But be cautious, as the information they emphasize may not present the entire picture. Therefore, it is advisable to thoroughly read the complete annual report when you have the opportunity.

Pay close attention to the highlights chosen by management and the actual financial statements. Despite this, expect significant fluctuations in share prices during earnings season.

Even if a company had a successful year, its share price could drop, or vice versa. These decisions are influenced by investor expectations, which focus on the future rather than the past.

Earnings Reported Will Not Change

The sudden influx of annual reports may initially overwhelm you, but their outcomes are already known. Regardless of how promptly you read them, their contents won’t alter.

Moreover, even if you were to read the report immediately, the likelihood of comprehending all the information and reacting sensibly is slim.

The gravest mistake would be excessively focusing on the stock price fluctuations on the day of the report. Such movements often swing between unwarranted optimism and pessimism. It’s crucial not to be swayed by emotional waves.

Behavioral finance, a captivating field, significantly influences numerous investors. Regardless of your ability to control emotions, there will be moments when your guard slips.

Especially with technological advancements, we now have constant access to our stock portfolios. The continuous ups and downs throughout the day can be mentally taxing.

Hence, it’s important to remember that the stock price at any given time of day holds little significance, as long as the overall business outlook remains relatively stable.

If you can maintain a rational mindset, you might capitalize on these volatile price movements. Opportunities may arise when panicked investors sell, leading to discounted prices. There could also be instances of excessive optimism driving prices beyond reason.

Ultimately, the stock price doesn’t always reflect its intrinsic value. While reported earnings offer insights into a business’s performance, understanding the company itself is equally essential.

Business is A Business is A Business

We must remember that every ticker symbol represents a tangible business, yet people often detach the business aspect and refer to stocks by symbols. This detachment may seem harmless, but it diminishes the connection to the underlying businesses being freely traded.

Using actual business names could potentially reshape our investment mindset, possibly explaining the significant decrease in average holding periods over the past century.

According to a study by Reuters analyzing the New York Stock Exchange, investors currently hold stocks for an average of 5.5 months, compared to 8 years in the 1950s. The trend of shorter holding periods continues.

The automation and ease of electronic investing have contributed to heightened speculation in the stock market, leading to reduced investment and increased volatility.

It is understandable that people strive to make quick profits, particularly considering that the finance industry promotes over-activity with the creation of new financial products.

Amidst the immersive speculation, we must not forget that genuine businesses exist behind the ticker symbols.

These businesses possess the capacity to generate and expand their earnings power, ultimately creating substantial wealth for shareholders.

While speculators focus on short-term gains, businesses with strong fundamentals and competitive advantage prioritize long-term prospects.

Often, they are willing to sacrifice short-term profitability to amass greater long-term profitability. These perspectives are essential to consider during earnings season.

Instead of solely relying on the most recent earnings announcements, it is crucial to envision the business’s trajectory in the next ten years. Base your decisions on these assumptions.

Projected Future Earnings

Understanding a business’s past-year earnings performance is important, but it should not be overly emphasized.

During the 2020-2022 period, determining a business’s true financial performance might be challenging. It’s possible that 2023 marks the first year of normalcy for many reporting businesses.

When comparing 2023 earnings to the past two years, results may appear obscured or exaggerated. It could be more beneficial to compare this year’s results to those of 2019 and draw a line of best fit through these intermediate years.

Consider consumer discretionary stocks as an example. These businesses witnessed remarkable growth during the pandemic, driven by increased online shopping. You could argue that this growth was however, not sustainable.

Much of this growth may have been brought forward, causing share prices to reach excessive levels. Consequently, many of these stocks have declined significantly from their peak values as investors realized their over-zealousness during that period.

Moreover, with rising interest rates and inflation, these same stocks have been heavily impacted, resulting in their P/E ratios falling below the stock market average.

Paradoxically, despite the favorable buying conditions, investors have engaged in a selling frenzy over the past few months. However, with the more recent recovery in these stocks maybe the masses have come to realise this.

While annual reports provide insights into past performance, it’s crucial to pay attention to management’s outlook. Specifically, focus on whether they are discussing past events or looking to the future. Management that prioritizes the future is more likely to strive for ongoing growth.

Businesses can experience years of disappointing results, and in the case of consumer discretionary stocks, high inflation erodes confidence. However, if you possess a deep understanding of the business and are confident in its ability to withstand challenging times, it may present the best opportunity to buy.

Key Takeaway

• Do not be overwhelmed by annual reports or focus excessively on stock price fluctuations. Instead, maintain a rational mindset and focus on the overall business outlook and intrinsic value.
• Remember that ticker symbols represent tangible businesses, not just abstract symbols.
• Despite speculation, focus on businesses with long-term potential and consider future trajectory when making decisions.

Incognito Wealth – Investing Tools

Need help with investing in the stock market or personal finance? Visit my Etsy store for digital excel templates. Simplifying finance so that everybody can reach financial independence.

Incognito Wealth - Financial Independence One Investment at a Time