How should you trade the US earnings season?
US earnings season refers to the months when most listed corporations release their quarterly earnings. These usually occur in January, April, July and October, lasting for about 6 weeks. Earnings season is a good time for investors to seek opportunities within the markets, review their investments and rebalance their portfolios.
At the same time, earnings season comes with its own share of heightened volatility, as the released earnings reports are usually followed by an earnings call by the management. Market analysts will then estimate the outlook of the companies, which cause an adverse impact on the stock prices of the companies. These present trading opportunities for investors to go long or short with these estimates.
The current US earnings season may perhaps be one of the most highly anticipated, as it is the first reporting season since the Covid-19 pandemic. This will determine how companies fared through one of the biggest health and economic crises for the United States in recent years.
“Market participants are resigned to the fact earnings this quarter will be poor. But the hope remains that the deepest economic and financial impacts of the crisis have passed, with the earnings and macroeconomic outlook to trough and improve from here,” says Kyle Rodda, Market Analyst, IG Australia.
What the market wants to find out from this US earnings season
Rodda also discusses 4 key questions that market watchers will be seeking to answer during the current US earnings season.
Key Question 1: What is the impact of Covid-19 on company profits?
Rodda expects a “dismal reporting period” for S&P 500 companies, with an estimated 44% contraction in overall earnings growth, and a contraction of nearly 90% for the industrial sector.
Key Question 2: What shape will the recovery take?
Besides looking at bottom-line figures, market watchers will also be looking carefully at companies’ forward earnings guidance, to catch a glimpse of how the economic recovery in US will be. In particular, market watchers want to know if the worst is over.
Key Question 3: Can the earnings justify the market’s rich valuations?
While the S&P 500’s forward price to earnings remains high, the punishing earnings from this quarter will have many questionings if those valuations are sustainable and justifiable based on company fundamentals.
Key Question 4: How could this earnings season impact the financial markets?
Rodda noted that global markets and the S&P500, have been trading rangebound with a pattern of consolidation. “Technical indicators point to a market poised to break-out to the upside in the short-to-medium term. But this outcome relies heavily on US corporates delivering an upbeat message about future growth conditions and earnings.”
How can you get started trading during the US earnings season and what should you be looking out for? Here’s what you need to know.
Do your homework, prepare a watchlist
Before the start of the earnings season, it is a good time to start keeping a watchlist of companies that you are already invested in or would like to invest in. Your watchlist will help you to narrow your focus on a handful of companies, amid the information overload that defines every earnings season.
Incidentally, this would also be the best time to look at the research being released by market analysts. Fundamental analysts would be looking at companies’ business models, financial ratios, and cash flows to calculate their expected earnings per share (EPS) and their intrinsic market valuations. Technical analysts would also be highlighting companies with strong chart patterns emerging ahead of their earnings release.
Having all this information at hand will enable you to know how you are going to trade when your watchlist companies are about to release their earnings. Prior to the release, you can read up on analysts’ commentaries to get a better understanding on the expected EPS. Once releases are out, you will know immediately if their actual EPS have met or disappointed expectations, and whether the company’s valuation following its earnings announcement is attractive or not.
Know which sectors to focus on
One way to fill your watch list is by knowing which industries or sectors would be interesting. You can narrow down to these 6 groups of companies to watch, as they were heavily impacted by the Covid-19 pandemic. These include
- Stay-at-home stocks
- Remote working stocks
- Coronavirus Vaccine stocks
- Travel stocks
- Bank stocks
- 5G stocks
These sectors of interest will vary for each US earnings, so it is always a good idea to look out for the most updated resources before each earnings season. You can also find some other top US stocks to watch here.
How to trade the US earnings season effectively
If you are prepared to start trading the US earnings season, here are some ways you can trade more effectively.
Going long or short with Contracts for Difference(CFDs)
Trading CFDs allow investors to place long and short positions on a large range of US stocks, so you can benefit from rising and falling prices. IG is currently offering a minimum commission of US$8 for accredited investors who trade CFDs on US stocks.
Utilise effective risk management tools
Investors can also protect their trades with effective risk management tools like Guaranteed Stop Loss Orders (GSLO) and Knock-outs, when they trade with IG. Both these tools protect investors from losing more than their initial margin.
Trade US stocks during pre and post market trading hours
One of the biggest hurdle for traders in Asia trading US stocks is the time difference. As most US companies release their earnings outside of the main session, the majority of trading takes place in the pre- and post-market sessions. Accessing the markets before it open allows you to take a position on your stocks giving you the advantage of getting ahead before the main session starts. Conversely, when you trade during after-market hours, you are able to hedge your position when the market closes. Understand more about extended trading hours here.