It's earnings season for stock investing again and it seems investors are dreading the potential outcomes. But it should be noted that not all sectors are going to suffer in the same way, and we may be in for more than one surprise. Let's see then what are the keys to this results season for the investment in stocks, which may differ from what we saw a few months ago...
1. Focus on the future and not be influenced by the press
This earnings season is notable primarily because actual earnings don't matter. One catalyst that drives a change in forecasts is when a company's management updates its future outlook, such as improvements in revenue and profit forecasts. At that point, analysts begin to change their own forecasts, and it is those new predictions that move stock prices after an earnings report. For example, the relationship between stock prices and S&P 500 price estimates (blue line) is compared to analyst forecasts for 12-month forward earnings per share (EPS) (black line) for the index companies. In times of economic growth, companies raise their forecasts, analysts tend to follow their example and prices move almost in tandem.
Comparison between changes in EPS vs profitability of the S&P 500. Source: FactSet.
Historically, we can see that the price of the S&P 500 has always fallen before companies cut their forecasts. This is because markets perceive these changes before companies or analysts have the opportunity to change their plans. The S&P 500 is currently giving us a warning to expect forecast cuts. After all, bosses are likely to cite challenges such as rising costs, a strong dollar and a weakening global economy as reasons for taking a conservative approach when updating their outlook.
2. Beware of big stock price movements
One of the biggest victims of this bear market has been Netflix (NFLX). When it presented its first results this year, it fell and it was at that time that investors rushed to acquire more shares of the company. But the outcome of this film ended badly, since in the following season the results were even worse than in the previous one and the shares plummeted.
Netflix Share Price: Source Tradingview.
But it seems that this movie has different sagas in the stock investment market. Many stock prices have moved after reporting results, attracting investors looking to buy the dip or sell the rise. But we should take a step back and think that a lower share price is not a bargain if the company's prospects are not on track. So we have to ask ourselves if the long-term future of the company has changed significantly, as that should influence our decision much more than the change in the share price.
3. The most important thing is to maintain our best investments
Investors always have a key aspect that drives us to want to invest in a company. It may be based on growth prospects or the ability to resist the effects of inflation. We don't know for sure what the key factors are for each S&P 500 company, but there are some important themes that matter for certain types of companies. In the case of investing in shares of technology companies, we have to look at the growth in revenue from cloud services, which are at risk of suffering a reduction in technology spending. Major cloud players, such as Amazon (AMZN), Microsoft (MSFT) Y Google (GOOGL), have been enjoying cloud revenue growth for years, and any sign of a slowdown could be a red flag for investors.
But for investing in consumer stocks, the focus will be on whether they can raise prices without fueling demand. Companies with strong power price fixing They are better able to pass on cost increases to their buyers, meaning they should be well placed to fight the inflation battle. Evaluating the acceptance of these price increases will be one of the main concerns of investors.
What aspects do we have to take into account?
There are two things important for manufacturers of industrial products. As is the case with consumer companies, industrial companies with strong pricing power are less likely to lose customers to another supplier when they raise their prices to offset rising costs. Investors will also look for changes to sales forecasts. The outlook is expected to be lower in this weakened economic climate, but whether or not companies meet those revised predictions will dictate how investors react. Investors are nervous, so we will likely experience the same volatility we have seen in recent quarters. Now, that fear can create opportunities to make an investment in stocks of high-quality companies that have good long-term prospects. Regardless of the short-term dynamics, one should be wary of highly volatile price movements.