Here's Why I Hate Earnings Season (and Why You Should, Too)
Earnings season is a complete waste of time.
For whatever reason, investors seem to think that earnings “beats” matter.
But they don’t…
The big problem with earnings, according to MarketWatch’s Jeff Reeves, “is that the game is rigged, and that earnings ‘surprises’ aren’t much of a surprise at all for Wall Street.”
What Jeff means is that most companies usually top analyst forecasts. That’s how the game is played. They set the bar so low that even the weakest reports tend to beat the magic number. Ta-da!
“Research from Bespoke Investment Group calculates that the average ‘beat rate’ — the percent of the time a company beats the consensus earnings estimate — is 61% for the broader market. For the technology sector, it’s 70%. In a better-than-typical year, even more will,” Reeves explains. “That’s exactly what we’ve seen most recently, with 75% of tech stocks in the S&P 500 posting above-average earnings and another 6% posting in-line EPS last quarter, according to FactSet. Even crazier are consumer staples, of which 85% of stocks in the S&P 500 topped earnings estimates in the first quarter and 6% were in-line — meaning just 9% of staples names missed the mark.”
But the financial media can’t help themselves. Even though it’s a perfectly ordinary occurrence, they fawn over every earnings report that beats by a couple of pennies—then freak out when a stock that misses estimates gaps down double-digits.
Get ready for plenty of these breaking news stories polluting your computer screen over the next couple of weeks…
BREAKING: No one cares!
The worst part of earnings season is the problems it causes with trading. You could have a nice little uptrend on your hands that hits a brick wall because investors decide they don’t like something about the company’s revenue growth or how the CEO answered a question on the conference call. It’s downright maddening…
Investors and analysts also have a nasty habit of making poor earnings growth guesses at the very beginning of the year. And if you base your trades on these guesses, you’re going to end up disappointed… or broke.
Over the years, the earnings prediction cycle is becoming, well, pretty darn predictable.
Here’s how it goes:
Analysts trot out their most optimistic guesses in January-February as fourth quarter numbers start to stream in. The predictions are mostly upbeat and they get even stronger for the third and fourth quarters.
Of course, the guesses usually don’t stand the test of time. Analysts are forced to swoop in with their revisions when the rosy predictions from the beginning of the year don’t pan out. So it goes… year in, year out.
You can dance with these earnings guesses all night. You can take them apart, turn them inside out and make models of your own. But the market will do what it does. I don’t care how smart you think you are. Even the best analyst’s guesses just don’t matter.
You’re much better off if you scrap the predictions and take what the market gives you…
Analysts will eventually revise these new earnings estimates, too. It’s only a matter of time.
Do yourself a favor and ignore the earnings season noise. The major averages are breaking out for the first time in more than a year. Enjoy it…