Traders on the floor of the New York Stock Exchange on October 14, 2022.
Spencer Platt | Getty Images News | Getty Images
It’s been a big week for stock investors.
Several of the largest U.S. companies are reporting third-quarter earnings to shareholders — possibly the most important week of the earnings season so far.
But what are “yields” and why should investors care about them?
Treat earnings as a company’s “transcript”
Earnings are synonymous with “profit”. After each calendar quarter, public companies disclose their profits, revenues and other performance metrics to shareholders and analysts.
Think of these disclosures as a company’s “transcript,” said John Butters, senior earnings analyst at FactSet.
Earnings season is usually two to five weeks after the end of a quarter, he said.
About 20% of companies in the S&P 500, a stock index of the largest U.S. companies, had reported third-quarter results as of Friday, according to FactSet.
This week, 165 more are planning to do so. They include big tech companies like Google parent Alphabet, Microsoft, Facebook parent Meta, Apple and Amazon, as well as Boeing, Coca-Cola, Comcast, Ford, General Motors, Intel, JetBlue, Kraft Heinz, Mattel, McDonald’s, Southwest Airlines, and UPS.
Earnings can drive stock prices
Corporate earnings are the main driver of share prices. Companies can reinvest their profits to grow the company or return earnings to shareholders as dividends. Experts say even healthy companies can sometimes report lower quarterly profits, but in the long run, sustained earnings growth is often associated with higher stock prices.
“In a way, that’s what capitalism is all about: it’s about profits, it’s about making money,” said Charlie Fitzgerald III, a certified financial planner and associate of Moisand Fitzgerald Tamayo founder.
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But the stock market is a forward-looking beast. If investors have priced in those expectations, a company that reports financial metrics in line with expectations probably won’t see much volatility in its stock.
“The market is always looking forward,” Butters said. “What companies are reporting now is a bit like a rear-view mirror.”
Companies that are surprised by declines or gains are likely to see short-term moves — down about 2% and up 1%, respectively, on average, according to FactSet. The indicator measures the share price of S&P 500 companies two days before and after earnings reports.
Disappointing earnings from a range of companies are usually a negative economic indicator.
“Guidance is one of the focus for investors”
In addition to company metrics, officials forecast future business and economic conditions in public calls with analysts when companies release earnings reports.
These forward-looking comments are often the information investors are most interested in — especially at a time when inflation is hovering near the highest levels in decades, the Federal Reserve is aggressively raising borrowing costs and some market watchers believe a recession is looming.
“Given all the uncertainty … that guidance is one of the focuses for investors this season,” Butters said.
Of course, stock investors are typically long-term investors — meaning the average person saving for future goals like retirement shouldn’t pay too much attention to an earnings report or a quarter, Fitzgerald said.
These investors may also save in mutual funds or exchange-traded funds that hold thousands of stocks, meaning their portfolios will be unaffected by the earnings of any one company.
“It’s interesting to know what’s going on, but [a quarterly earnings report] It shouldn’t prompt you to suddenly change your philosophy or approach,” Fitzgerald said.