Market on edge: 6 key tactics to prepare for earnings season

But beyond the data, earnings season also has its quirks. From the “earnings whisper” to the role of aluminum giant Alcoa, here are a few interesting facts that give some color to this otherwise intense period for investors.

The earnings kickoff: early insights from PepsiCo

The earnings season began with PepsiCo (PEP), which often provides an early glimpse into consumer spending trends. PepsiCo’s recent report exceeded Wall Street expectations, with strong demand for beverages and snacks despite inflation. This positive signal helps set the tone for consumer discretionary and staples sectors, reinforcing the idea that companies with strong brand loyalty can outperform even in times of uncertainty.

For many years, however, Alcoa (the aluminum giant) was the “unofficial” start of earnings season. While its importance has waned, Alcoa’s results were closely watched because aluminum’s widespread use across industries made it a key barometer for global economic health.

Preparing for earnings season

Review current holdings: has your long-term outlook changed?

The key question for long-term investors is: Has my long-term outlook for any of my holdings changed? Earnings reports provide backward-looking data and forward guidance. If a company significantly adjusts its guidance or reveals concerning trends, it could change the investment thesis.

For long-term investors, individual quarterly earnings are less critical than a fundamental change in the company’s position. If you own a stock like Apple (AAPL), and management signals strong demand, short-term dips can be noise rather than a reason to sell.

Actionable tip: Before earnings season, review your portfolio. Identify companies where the long-term outlook may have shifted. Are there rising risks (e.g., sector disruption, management changes) that make you question holding the stock over the next 3-5 years?

And, as you review your holdings, keep in mind that not all information moves the market right away. There’s something called the post-earnings drift—a phenomenon where stock prices continue to drift in the direction of the earnings surprise for days or even weeks after the report. This can give you time to act on new information while others are still processing the news.

Entry and exit decisions: before or after earnings?

Many investors debate whether to buy a stock ahead of earnings or wait. Buying before earnings can capture upside if the company beats expectations, but comes with the risk of a sharp selloff if they miss.

Buying before earnings: If confident in long-term fundamentals and believing the market underprices the stock, entering before earnings can make sense. For instance, if tech stocks are overly punished, buying companies like Alphabet (GOOGL) or Microsoft (MSFT) before their results could be a good move.

Buying after earnings: For risk-averse investors, waiting until after earnings may be safer. You may sacrifice some upside but gain clarity on the company’s performance.

Also, keep an ear out for the earnings whisper—the unofficial number that circulates among investors and traders. It’s often based on rumors or insider sentiment, and stocks can sometimes move sharply if they hit or miss this whispered expectation, even when they meet the official consensus.

Sector-specific risks and opportunities in a rate-cutting environment

If we’re entering a rate-cutting cycle, dynamics shift across sectors, especially for financials. While rising rates often benefit banks by boosting net interest margins, rate cuts tend to compress margins, potentially pressuring large institutions like JPMorgan (JPM), Wells Fargo (WFC), and BlackRock (BLK).

Key sectors to watch:

• Financials: Banks may see pressure on profitability due to lower net interest margins, but improved loan demand and reduced credit risks could help.
• Technology and growth stocks: Lower rates favor growth stocks, as the discount rate for future earnings falls. This could benefit companies like Apple (AAPL) and Microsoft (MSFT).
• Real estate: Lower rates generally benefit real estate companies and REITs as borrowing costs decrease and property values rise.
• Consumer discretionary: Lower borrowing costs may boost consumer discretionary sectors. Companies relying on consumer spending, such as automotive and retail, could benefit from increased activity.

And beware of the Thursday surge—most companies avoid reporting earnings on Mondays, leaving Thursdays as one of the busiest days for earnings releases. This allows time for results to be digested over the weekend, making Thursday afternoons and Friday mornings a critical time for investors.

Expect volatility, but stay focused on the long-term

Earnings season often brings volatility as markets react to reports and guidance. For long-term investors, short-term price swings are less important. If your investment thesis is based on long-term growth, a single earnings miss is unlikely to change that.

Actionable tip: Stick to your strategy. If confident in the fundamentals, avoid knee-jerk reactions based on short-term results. Volatility can present buying opportunities for high-quality stocks.

Be cautious if a company delays its earnings report, though. While not always a cause for concern, a delayed earnings release could signal internal challenges or financial disclosure problems.

Opportunistic adjustments: trim or add?

Earnings season can be a time to reassess whether to trim overvalued positions or add to those with strong fundamentals but overly pessimistic market sentiment.

Actionable tip: Evaluate whether to take some profit from high-flyers or add to undervalued positions. Reassess your sector allocation based on earnings and macro conditions.

Also, keep in mind that some companies strategically time their earnings releases. Bad news might be reported when another company is making headlines, while good news may be saved for quieter days to maximize attention. This timing tactic can affect how the market absorbs earnings news.

Analyst expectations vs. actual performance

One critical factor during earnings season is how a company’s performance aligns with analyst expectations. Even when a company posts strong results, failing to meet market expectations can trigger volatility. For long-term investors, understanding whether a miss is due to one-off factors or a structural issue is crucial.

Conclusion: stay disciplined and focused on fundamentals

As earnings season unfolds, it’s easy to get caught up in market reactions. However, long-term investors should focus on the bigger picture: Is the company still delivering on its growth story? Are management’s initiatives on track? If yes, short-term fluctuations matter far less than the company’s ability to create long-term value.

By preparing ahead of earnings season—reviewing your holdings, making strategic decisions, and focusing on long-term fundamentals—you’ll be well-positioned to navigate volatility and capitalize on opportunities.

And don’t forget about quadruple witching, when four types of financial contracts expire simultaneously, often adding to the market’s volatility. This phenomenon happens four times a year, sometimes coinciding with earnings season to create an especially intense trading environment.