Every three months, companies give the public (and the Securities and Exchange Commission) a rundown of how they’re doing. And Wall Street pays close attention.
“Earnings season” headlines—which have dominated the business news for the past few weeks—have the power to move markets, at least in the short term. After all, when industry leaders explain how and why they've been making or losing money, as well as what they expect the future holds, investors listen.
So, how are earnings this season?
Mostly good. Earnings at companies in Standard & Poor’s 500-stock index were expected to rise 11 percent in the second quarter of 2017, after increasing 15 percent in the first quarter, according Thomson Reuters. That’s the first time since 2011 that profits have gone up by double digits two quarters in a row. What’s more, 73 percent of S&P 500 companies that reported as of July 28 beat analyst expectations, according to financial research firm FactSet.
This positivity has helped stocks continue to rise. In July, the S&P 500 had a total return (including reinvested dividends) of 2.06 percent, and the Dow Jones industrial average went up nearly 500 points, or 2.33 percent.
Among the gainers are familiar names like Facebook. The social media giant reported earnings of $1.32 per share, handily beating analyst expectations of $1.13—and the stock jumped as much as 4 percent. Apple also beat estimates, sending its stock up 6 percent on August 2, which helped to push the Dow Jones Industrial Average (an index that includes Apple and other big companies) above 22,000 for the first time.
But it’s not all good news. For example, Amazon, for all its success at disrupting industries, failed big time in meeting expectations. The online retailer reported earnings of 40 cents per share in late July, far below the expected $1.39 per share, sending the stock price down for days.
What does all this mean for investors?
For most of us, not much. While traders and analysts watch these numbers closely in order to glean big-picture information on areas of opportunities and macroeconomic trends, earnings season shouldn’t affect long-term investors’ outlook or strategy.
“As long as your portfolio is diversified and you’re investing for the long-term, short-term fluctuations due to quarterly earnings reports should not matter much to you,” says Certified Financial Planner Vid Ponnapalli. “Just stay focused on your long-term financial goals.”
While temporary post-earnings dips can be opportunities to pick up more shares of a stock you believe in for the long run, trying to time the market is a risky (and often costly) proposition.
A better solution: Investing in funds, like low-cost exchange-traded funds (ETFs), to ensure your portfolio is diversified and your risk is spread across hundreds of companies. This way, you’re protected from the ups and downs of earnings season: While one company’s stock may drop, others that rise can balance it out.