Earnings season is well upon us, and this week will see a rash of big names reporting calendar Q3 results. The sheer volume of earnings hitting the wire at this time each quarter can make it a confusing time for individual investors. So it is important to take some time each earnings season, before the rush starts, to work out what you are looking for.
First and foremost, it is important to realize that not every earnings report, nor even every high profile one, is relevant to your portfolio or to the state of the economy and market overall. Earnings are, by definition, company specific, and if you don’t own the individual stock, even much hyped and talked about results can oftentimes just be ignored. We live in an interconnected age, and it is therefore tempting to look at everything as relevant to everything else, but that just isn’t the case when it comes to earnings.
When Netflix (NFLX) reports on Wednesday, for example, it will no doubt garner a lot of headlines, but all it will really tell us is how that company is doing in a very competitive streaming market. Their performance won’t be an indicator of consumer sentiment or economic health. It will just be about how popular their current offerings are.
Similarly, much of the focus this week will be on bank earnings, but the overall performance of Bank of America (BAC), Goldman Sachs (GS), Morgan Stanley (MS), or any of the smaller, regional and specialist banks reporting this week, will be largely dependent upon their trading performance in what has been a lively fixed income market. There are details to look for, particularly how their loan portfolios are performing given the massive level of debt in the U.S. as interest rates climb, but their bottom lines should not be of any interest to non-stockholders. Overall, given the volatility in fixed income, equities, forex and commodities over the last three months, good results from the banks based on trading profits can be expected. That will impact the bonuses of their traders and executives and the price of their stocks but will say nothing in any other regard.
That doesn’t mean, however, that all highly touted earnings are irrelevant if you don’t own that company’s stock. Tesla (TSLA) will also report on Wednesday, and while most people view them as a highly specialized company, their results will be an indicator of broader economic conditions. For all that they are seen by many people as a tech company, Tesla makes high end cars, and people’s willingness to take out what are now much more expensive loans to buy them will say a lot about how secure those people feel in their jobs and financial futures.
As to what to expect from Tesla, it seems reasonable to anticipate a beat of stated expectations. For all of his bombast in other areas, Elon Musk leads a company that has traditionally been quite conservative in their guidance, and that has been focused on margin improvement for a while. That is largely why they have beaten estimates handily in eight of the last nine quarters, with the one miss being by a penny. That doesn’t mean that the stock will pop, of course, because another conservative guidance would prevent that, but it does mean that long-term investors can be secure in the knowledge that Tesla is on the right track.
In many ways, this earnings season is unusual in that the lack of relevance of high profile earnings to most investors will be clearly on display. Inflation and its impact on interest rates are what is driving the market right now, and no one company’s performance over the last three months will trump that. The overall trend in earnings will probably be positive, once again pointing to the resilience and adaptability of American corporations, but while that may give the market a temporary lift, none of it will matter if FOMC board members start making hawkish noises over the next few weeks.
The strategy for investors, then, as earnings come in at a bewildering pace, should be to be careful about attaching too much importance to them in terms of broad market moves. Corporate earnings are the ultimate driver of stock prices, but right now, traders are all too aware that past performance does not guarantee future results, and they will be focused elsewhere for indications of future market moves. As an individual investor, you should be, too.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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