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Imagine that, once every few months, you must release information detailing your current financial standing. The public can see where you’ve spent money, made money, or even how much you’ve saved.

Sounds intimidating, right?

That’s just a different way of describing what earnings season is.

The period is undoubtedly hectic for market participants, with companies finally revealing what’s transpired behind closed doors.

And on top of being hectic, it’s impossible to understate the importance of the period. For those wondering why it’s so critical, let’s look at three reasons that help explain its significance.

Earnings Season Gives Critical Business Updates

Earnings reports provide market participants with a plethora of information, including revenues, expenses, and profits, just to provide a few simple examples. It’s critical for investors to receive this information, as it gives a deeper view into the business and allows them to see any potential red flags.

Take, for example, Arista Networks ANET, which recently upped its current year (FY24) revenue growth guidance, causing shares to soar post-earnings. Arista Networks has communicated that it’s been enjoying healthy demand, reflected by the guidance upgrade.

Arista Networks is a Zacks Rank #1 (Strong Buy), with earnings expectations moving higher across the board.

Image Source: Zacks Investment Research

Quarterly Reports Impact Share Prices

A company’s quarterly earnings report commonly impacts its stock price, a theme market participants have undoubtedly noticed. Typically, we’ll see bullish share movement post-earnings from companies that surprise positively or raise their guidance, reflecting healthy business.

e.l.f. Beauty ELF saw its shares soar post-earnings following its latest release. Concerning headline figures, earnings grew 15% alongside a 71% sales bump. Below is a chart illustrating the favorable reaction post-earnings that e.l.f. Beauty enjoyed.

Image Source: Zacks Investment Research

It’s worth noting that implementing a stop-loss at a comfortable threshold will help limit spooky post-earnings price swings, preserving precious capital.

Earnings Season Highlights Current Trends

Earnings season can also provide a big-picture view of overall trends within the economy or industries. For example, if many companies report solid quarterly results, it likely indicates that the economy is performing well and that the stock market could benefit in response.

Conversely, if many companies report weaker-than-expected earnings, it may signal that the economy is slowing, which could negatively impact stocks overall.

It also provides insight into current business trends within industries, allowing investors to position themselves appropriately. For example, Amazon AMZN has posted robust AWS results as of late, reflecting an uptick in demand for cloud computing services amid the AI boom.

Analysts have become notably bullish for Amazon’s current fiscal year, with the current $4.58 Zacks Consensus EPS estimate up 93% over the last year. Below is a chart illustrating the favorable revisions trend for Amazon.

Image Source: Zacks Investment Research

Bottom Line

While earnings season is undeniably hectic for everyone involved, that’s just the nature of the period.

It’s important for investors to understand why it matters for many reasons, including providing investors with an updated financial standing, the volatile price swings sometimes seen post-earnings, and the overall picture it provides on market and industry trends.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.