Trading Earnings Reports: How to Read Earnings, Revenue and Guidance

What are earnings reports?

Listed companies report regularly on their business. In the US this happens quarterly, with a quarterly report to the Securities and Exchange Commission (SEC) and a press release with the key figures. In Europe, half-year reports are mandatory, but many large companies also report every quarter. The report usually comes with a conference call in which management answers analysts' questions.

In the US, earnings season starts about two weeks after the end of the quarter with the large banks and runs for around six weeks. During this time most large companies report. The companies announce the dates themselves, usually a few weeks in advance.

When do the figures come out?

Most companies publish outside regular trading hours: before the market opens or after it closes. That way all investors have the same time to read the figures before regular trading begins. The consequence is a gap: the stock opens the next trading day well above or below the last closing price.

How do you read earnings reports?

The figures are measured against analysts' estimates, the consensus. A company that increases its profit can still disappoint if analysts had expected more. Three figures matter most: revenue, earnings per share and guidance.

Guidance often matters more than the figures

The figures describe a completed quarter, the guidance the future. Because stock prices anticipate future earnings, the market often reacts more strongly to a change in the outlook than to the figures themselves. A company that beats expectations but lowers its guidance frequently falls. Conversely, a stock can rise despite weak figures if management raises its forecast.

Adjusted figures and one-off items

Many companies report an adjusted profit alongside the profit under accounting rules, excluding one-off costs such as write-downs, restructuring or litigation. The consensus usually refers to the adjusted figure. Anyone comparing the unadjusted profit with the adjusted consensus reads a surprise that is not one.

The chain of effects: what earnings reports move

Earnings reports move the stock itself first, often more than any other event of the year. From there the effect reaches further, depending on the size of the company.

• The stock: a gap at the open, then continuation or pullback, often with the highest trading volume of the quarter.
• Sector: competitors and suppliers move along, because the figures give hints about the whole sector.
• Indices: very large companies carry a high weight in indices such as the Nasdaq 100 or the S&P 500. Their figures after the close move index futures overnight.
• Currency and gold: single earnings reports hardly move currencies and gold. A whole earnings season can, however, shape risk sentiment.
• Cryptocurrencies: companies with large crypto holdings or from mining also report on these holdings, which moves individual stocks. This rarely affects Bitcoin itself.

When the figures do not work as expected

• Priced in: if the stock rose strongly before the figures, a narrow beat is often not enough.
• Expected move: before the figures, the options market prices in a certain swing. If the actual move stays below it, even a surprise looks weak.
• Conference call: management's remarks in the call can reverse the first reaction.
• Market environment: in a falling overall market, good figures get sold too.

Revenue or earnings: which matters more?

That depends on the company. For fast-growing firms that earn little so far, the market looks mainly at revenue and guidance. For mature companies, profit, margin and dividend count. Revenue is harder to dress up, profit shows how efficiently a company works.

Teaching examples

The following cases are teaching examples with round numbers, not real companies, and give no price moves in percent.

Teaching example 1: figures beaten, guidance lowered

A company reports earnings per share of 1.10 against an expected 1.00 and revenue above the consensus. For the next quarter, however, it lowers its revenue forecast below analysts' expectations. After hours the stock rises at first, turns during the conference call and opens with a gap down in the morning. For the market, the future counts more than the completed quarter.

Teaching example 2: earnings missed because of a one-off item

A company reports reported earnings per share of 0.80, while 1.00 was expected. The report shows a one-off write-down; adjusted, earnings are 1.05. Guidance is raised. Anyone reading only the headline sees a disappointment, but the market sees a slight upside surprise.

Teaching example 3: a competitor moves along

A large manufacturer reports significantly higher demand for a component. The shares of its suppliers rise on the same day, even though they have not reported themselves. A week later one supplier reports and confirms the picture only partly. The anticipated move is partly given back.

Earnings reports in each trading style

FinScans signals exist only for forex and crypto pairs, not for stocks. The following sections therefore describe how the four trading styles handle earnings reports when you trade stocks or indices, using the timeframes FinScans assigns to the styles.

Earnings reports in scalping (15m, 30m)

In scalping on 15m and 30m, trading begins with the open after the figures. In the first minutes spreads are wide and swings are large, because orders from pre-market and after-hours trading are released. Many scalpers wait for the first closed 15m candle and then trade the breakout from its range in the direction of the gap, or the pullback into the gap.

Anyone scalping index futures watches the figures of the largest companies after the close during earnings season. They move the Nasdaq 100 and S&P 500 in after-hours trading already, when liquidity is thin. Holding positions through the figures is not an option for the scalper, because the gap can jump over any stop.

Earnings reports in day trading (1h, 2h)

In day trading on 1h and 2h, the day after the figures is often a stock's most active day of the quarter. Two patterns are common: the gap is extended during the day, or it is closed fully or partly. The closed 1h candle after the open shows which pattern prevails.

An entry follows the close beyond the range of the first hour, with the stop on the other side. If the stock holds the level of the open through the morning, that argues for continuation. If it falls back into the gap, the market has accepted the surprise only partly. The day trader holds nothing overnight, so the next figures from other companies affect them only the next morning.

Earnings reports in swing trading (4h, 8h)

In swing trading on 4h and 8h, the key question is whether to hold through the figures. The gap can jump far over the stop, so that the loss turns out much larger than planned. Many swing traders therefore close before the figures or reduce the position so that even a large gap remains bearable.

After the figures, entries arise when the stock holds the level after the gap over several 4h candles. Research has described that prices often continue to drift in the direction of the surprise for some time after clear surprises. A pullback to the edge of the gap that holds can therefore be an entry, with the stop inside the gap.

Earnings reports in position trading (12h, 1d)

In position trading on 12h and 1d, earnings reports are milestones in a company's story. More important than a single quarter is whether revenue, margin and guidance point in the same direction over several quarters. A company that raises its forecast several times is in a different trend from one that lowers it several times.

The position size is chosen so that a gap after the figures remains bearable, because a position trader almost always holds through several reports. In the FinScans cockpit, the news situation counts for more than the technicals on the long horizon, as the methodology on horizons explains.

Earnings reports and technical signals

A gap after earnings reports overrides technical levels. A trendline or a support and resistance level is not broken but jumped over, and a stop behind it is filled at the next available price. The edges of the gap then often become support or resistance themselves.

Technical patterns that formed shortly before the figures are therefore weakly supported. Only the candles after the gap show whether the market accepts the surprise. The FinScans signals for forex and crypto pairs are affected only when major figures shift risk sentiment as a whole.

How to use FinScans for earnings reports

On the news page, reports can be filtered by type, including earnings on the news page. In the cockpit of a stock, FinScans combines trend and the news situation of the past 30 days into the overall assessment, and earnings reports feed into it like other reports according to sentiment and impact. This is described in the methodology on the news situation.

The FinScans economic calendar does not list earnings dates; it contains economic data and central bank events. For indices and large stocks it is still worth a look, because rate decisions and inflation data can override the reaction to figures during earnings season. The following block shows how many earnings reports FinScans has analysed in the past 30 days and how they were rated for the assets concerned:

Hybrid checklist: what the machine reports, what you check yourself

FinScans provides the earnings news and its rating in the news situation. How the figures compare with expectations, you check yourself, as described in hybrid trading. Around earnings reports, check:

1. When does the company report, before the open or after the close, and am I holding through this date?
2. How do revenue, adjusted earnings and guidance compare with the consensus?
3. Was the guidance raised, confirmed or lowered?
4. How did the stock perform before the figures, and what is already priced in?
5. Is my position sized so that a gap beyond the stop remains bearable? More on this in risk management.
6. Does the reaction fit the news situation in the cockpit and the sentiment in the overall market?

Frequently asked questions

Why does a stock fall despite good earnings?

Because the market measures the figures against expectations, not against the previous year. If expectations were high or the stock rose strongly beforehand, a narrow beat is not enough. The most common reason, however, is weak guidance: if management lowers its forecast, that counts more for the price than the completed quarter.

What is the difference between adjusted and reported earnings?

Reported earnings follow accounting rules and include all costs. Adjusted earnings leave out one-off items such as write-downs, restructuring costs or litigation and are meant to show the ongoing business. Analyst estimates usually refer to the adjusted figure. Which items are excluded is determined by the company itself.

Should you hold a position through earnings?

That depends on the trading style and the risk. A gap can jump far over the stop, and the loss is then larger than planned. Short-term traders usually close beforehand. Those who hold choose a position small enough that even a large gap remains bearable, and accept this risk consciously.

When is earnings season?

In the US, earnings season begins about two weeks after the end of the quarter, so in mid-January, April, July and October, traditionally with the large banks. After that, most large companies report within around six weeks. In Europe the dates are similar, but many companies report in detail only every half year.

Sources

• U.S. Securities and Exchange Commission: How to Read a 10-K/10-Q, investor guide on Investor.gov.
• Bernard, Victor L.; Thomas, Jacob K.: Post-Earnings-Announcement Drift: Delayed Price Response or Risk Premium?, Journal of Accounting Research 27, 1989.