Stock market earnings

The influence of quarterly earnings on the stock markets

Quarterly earning announcement by listed companies is an important event for the stock markets. The keenly awaited quarterly earnings announcements are one of the key triggers for the stock market from short-term perspective. The month of July is earning season for the stock markets. The companies present the first quarter performance in this month with IT companies taking the lead in delivering its quarterly performance from 11th of July onwards each year. Stock Markets taking their cue from this event either hit a high note or move into correction zone.

Why quarterly results
The trend of announcing quarterly results was started by IT companies’ few years ago. Since then the phenomenon spread to companies in other sectors as well. Quarterly Results, as the name suggests, is the announcement of the operational results by companies at the end of each and every quarter of a financial year. For instance, if financial year of a company is from April to March, at the end of every quarter i.e. June, September, December, and finally March, it’s quarterly results would be announced. According to listing agreement with the stock exchanges all companies listed in the stock markets have to release the quarterly results within a month from the end of the quarter. They are un-audited statements and hence could vary form the full year audited statements. However any variation beyond 20% is frowned upon and requires explanation to the stock exchanges.

Analysts’ estimates
Before any company declares it’s results analysts of all hues- from brokerage houses local and foreign, come up with their own estimates of what the company’s revenues and profits would be. Then a consensus estimate is arrived at for the respective company. Consensus estimates are basically the sum of all available estimates divided by the number of estimates. This gives a ballpark figure of the market expectation from the company.

Expectations vs. actual
Companies are judged by their ability to beat market expectations. How earnings results measure up to analysts' estimates are important to the price of stocks. Beating earnings estimates brings about a positive sentiment in the stock. A company that regularly exceeds expectations quarter-after-quarter is probably doing something right. If a company exceeds expectations, it's usually rewarded with a jump in its share price. If a company falls short of expectations - or even if it just meets expectations - the stock price can take a beating.

Managing expectations
In a bid to manage expectations companies "guidance" as to what they expect their future performance will be. The aim is to manage analysts' expectations to ensure earnings results and, at the very least, meet consensus estimates.

The quarterly message for investors
An investor who was actually waited for the year-end from the financial results will now get the financials of a company four times a year. This helps him deduce early on any warning signs in the stocks he has invested. He can interpret the results for an indication of the sustainability of profits that will carry on in the coming quarters. If you are a long-term investor, who is looking at a long-term horizon say 3-5 years you probably shouldn't give too much importance to short-term performances as they are not indicators of a company's long-term investment prospects. A quarterly result report is just an indicator that gives you the idea whether your investments are on track. Evaluating your portfolio on quarterly basis will help weed out stocks that have weak performance parameters and retain the strong ones.

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