Every three months, investors can count on the financial TV networks to light up with breaking-news alerts when large U.S. companies report quarterly earnings.
Since most companies peg their fiscal year to the calendar, a flurry of quarterly reports are filed with the Securities and Exchange Commission two to four weeks after each quarter ends.
With the third quarter wrapping up at the end of this month, these reports will dominate much of the business media from early October through early November. Typically, the focus is on components of the Standard & Poor’s 500 index, with an even bigger spotlight shining on the 30 companies that make up the Dow Jones industrial average.
The quarterly whirlwind even has its own moniker in the media: earnings season.
The S&P 500 index consists of many of the largest U.S. companies, weighted by market capitalization. Many of these companies are familiar household names, which only adds to the carnival atmosphere surrounding what is essentially a batch of regulatory filings.
Most of the S&P 500 companies have some sort of international exposure. This quarter, due to sluggish global growth, some analysts are forecasting weaker revenue and earnings for S&P 500 companies as a whole.
Researcher FactSet Research Systems, in a report issued Sept. 18, said the estimated decline for third-quarter earnings of S&P 500 components is 4.4 percent. It that occurs, it would mark the first back-to-back quarters of earnings declines since 2009.
Does this mean individual investors should make portfolio changes in anticipation of, or in reaction to, subpar earnings?
“I don’t believe that investors should track earnings season as closely as the financial media does,” says David Fabian, managing partner and chief operations officer at FMD Capital Management in Irvine, California.
Investors with a long-term view, he says, are not likely to make changes to their holdings based on a single earnings announcement.
“Moves in a stock post-earnings are often counterintuitive to the release. A stock can sell off after a solid earnings announcement just as easily as it could rally quickly,” Fabian says. “I also think that many short-term traders can get into trouble trying to guess or forecast how a stock will move based on an earnings call. Oftentimes, this will coincide with wide swings in the overnight session or big gaps up or down at the open.”
In other words, it’s fairly easy to make a wrong guess, which could wreak havoc on a trader’s returns.
Peter Jacobs, president and chief investment officer at Jacobs Broel Asset Management in Bellevue, Washington, says investors with long time horizons should not focus on quarterly reports. Jacobs’ firm defines “long term” as two years or more.
“That doesn’t mean individual investors should not review earnings reports and listen to the management’s conference calls or read the transcripts. But unless there is something that comes to light which materially impacts the investment thesis — for good or bad — then no need to do much. It is not unusual for stocks to show some volatility around earnings reports, but that volatility usually tends to be transitory if the long-term outlook has not changed materially.”
Jacobs says traders typically have a different perspective on earnings season. “Traders and short-term investors are another story; they relish in volatility that comes during earnings reporting periods.”
While earnings-season hoopla may make good television, financial advisors don’t suggest basing one’s investment philosophy on the number of S&P 500 companies that meet, miss or beat analysts’ views.
“Despite being long-term investors, individuals are barraged with current events and sound bites, generally short term in nature, that are sometimes designed to spur emotion and doubt. Earnings season is a great example of this,” says Steven Giacona, founder and managing partner at Round Table Wealth Management in Westfield, New Jersey.
Large domestic stocks are not the only investable asset class, although these stocks get the lion’s share of attention. In addition, even a portfolio of U.S. stocks should not have too large of a position in any single index, say advisors who advocate broad diversification.
“A well-balanced portfolio that includes not only large-cap stocks, but also small- and mid-cap, non-U.S. developed and emerging markets, is typically designed to mature over a full market cycle of five to seven years,” Giacona says.
That means short-term price swings that may result from a particular company’s quarterly report should not affect an investor’s overall strategy.
“We encourage our clients to stay current on macro events and geopolitical challenges. However, it is easy to fall prey to fixating on the micromanagement messaging from the media. We remind clients of their long-term objectives, the diversification of their portfolio and why it is positioned as such. If necessary, we remind clients that their well-diversified portfolio might only have a fraction of an interest in any particular large-cap stock, and that the impact of missing or exceeding expectations will have little effect,” Giacona says.
Rather than selling shares or rebalancing in reaction to disappointing results, Jacobs prefers to identify potential buying opportunities.
“Unless there is material new information that comes to light, we typically do not rebalance our portfolios leading up to or immediately following earnings reports,” he says. His firm may add to an existing position if earnings-season sell-offs create an attractive opportunity. More typically, Jacobs and his colleagues will start buying a stock they have been eyeing, but which happens to be selling off after the report.
“In these situations, we have already done our research and are confident in our understanding of the near-term issues and potential risks that could cause short-term investors to sell the shares, sometimes in an irrational manner, and offering us an attractive entry price,” Jacobs says.
Fabian reminds his clients that the short-term view of earnings season is prevalent on television, but doesn’t usually jibe with their long-term objectives.
“I typically tell clients who are overly focused on the day-to-day financial media that they need to tune out the noise,” he says. “Opinions from TV personalities are not going to influence immediate investment decisions. Instead, they should focus on a clear and balanced investment strategy that will weather both up and down markets. You can’t get caught up in the emotional roller coaster that is the stock market.”
More from U.S. News
13 Stocks to Buy to Bet on China
7 Facts Investors Should Know About Insider Trading
6 of the Most Unusual ETFs You Can Buy
What Every Investor Should Know About Earnings Reports originally appeared on usnews.com
