Every three months, publicly traded companies are required by the SEC to issue a quarterly financial statement. Usually referred to as quarterly reports or earnings reports, the data are released shortly after the close of each quarter.
The several-week-long period during which high profile companies release these reports is commonly known as the earnings season. And as you can imagine, this period receives quite a bit of attention from the financial media.
In the weeks leading up to earnings season, pundits and market experts will give their opinions on whether or not specific companies will beat their earlier earnings forecasts. Taken together, these opinions are considered the “expectation” that every company would like to beat. After all, it doesn’t look good to under-deliver.
According to financial writer Ben McClure, “For better or for worse, companies are judged by their ability to beat market expectations. All eyes are on whether companies ‘hit their numbers’–in other words, whether they manage to match Wall Street analysts’ consensus estimates.”
So-called bell weather companies can trigger short term market volatility if they miss their numbers. In fact, even if companies outperform expectations, there’s no reliable way to know whether their stock will go up or down. So putting too much emphasis on the quarterly reports themselves or their short-term impact on market movements doesn’t make much sense in the long run.
The Numbers Don’t Tell The Whole Story
The person giving the eulogy at a funeral is expected to tell the truth, but paint the dearly departed in the best possible light. In the same way, because quarterly reports are not audited, companies can smooth over potentially negative results by being selective about which numbers they publish and which details they withhold.
Writing for Forbes, value strategist David Trainer goes as far as to say that corporate earnings announcements provide investors with misleading data. “Only by reading all the financial footnotes, which are only included in annual 10-K reports filed with the SEC,” he writes, “can investors know the true profits of publicly traded companies.”
This yearly data trails even further than the quarterly numbers. But even if you could get it right away, it’s still a description of past performance and so cannot predict future results.
The market has thousands of companies that may be successful and profitable in the upcoming year. Some of them will even end up have better performance than their peers or industry. It’s just not possible to identify them ahead of time based on last year’s or last quarter’s performance.
Since you can’t pick them out individually, as a prudent investor, your best strategy is to own all of these companies through a broad-based strategy holding diversified exposures across global markets.
Here at The Financial Coaching Group, we can help you create a long-term plan that takes into account the unpredictable nature of the market.
The earnings season makes for interesting financial news and even some corporate drama. Just don’t let the temptation to react to Wall Street estimates and opinions derail your chances of reaching your long-term investment goals.