Earnings Season Explained: Estimates, Guidance and Why Stocks Gap

Earnings season is the few weeks after each calendar quarter ends when most US companies publish their results, roughly from mid-January, mid-April, mid-July and mid-October. A stock's reaction depends less on whether the results were good than on how they compare with what analysts expected and, above all, on the company's guidance for the coming quarters. Because most reports come out before the open or after the close, prices often gap, jumping straight past stop-loss orders.

The earnings calendar

US companies report four times a year. Large companies must file their quarterly report (Form 10-Q) within 40 days of the quarter's end and their annual report (Form 10-K) within 60 days, so most of the S&P 500 reports within about six weeks of each quarter closing. Big banks often go first. Each company announces its date in advance on its investor relations page, and brokers show earnings calendars.

Releases usually come at two times:

Release	New York time	Pakistan, US daylight time	Pakistan, US standard time
Before the open	About 06:00-09:00	About 15:00-18:00	About 16:00-19:00
After the close	About 16:00-16:30	About 01:00-01:30	About 02:00-02:30

What is in an earnings report

• A press release (also filed with the SEC on Form 8-K) with revenue, EPS on both GAAP and adjusted bases, margins and often figures by business segment.
• Guidance: management's forecast for the next quarter or year, usually as a range, for example "revenue of $10.2-10.5 billion".
• The earnings call: a conference call where executives discuss the results and analysts ask questions. Tone and answers on the call can move the stock as much as the numbers.
• The 10-Q or 10-K with full statements and notes, often filed the same day or soon after.

Estimates: beat or miss

Analysts publish forecasts for revenue and EPS. Their average is the consensus estimate. Results above it are a beat; below, a miss. Many companies set expectations they expect to clear, so a small beat is often treated as normal rather than as good news. What moves a stock is surprise: the gap between results and what the market had already priced in.

Why guidance often matters more

A share price reflects expectations about future profit (see what is a stock). The quarter just reported is already history; guidance changes the future.

Scenario	Quarter	Guidance	A common reaction
A	Beat	Raised	Often up
B	Beat	Cut	Often down, sometimes sharply
C	Miss	Raised	Often up
D	Miss	Cut	Often down

These are tendencies, not rules. A stock that has already risen 40% into earnings can fall on scenario A because the good news was expected.

Gaps

A gap is when a stock opens well above or below the previous close, with no trading in between. Earnings are the most common cause of large gaps in individual stocks.

How big a move is expected?

The options market gives a rough guide. An at-the-money straddle is one call and one put at the strike price nearest the stock price. Its price, divided by the stock price, approximates the move traders expect.

Managing earnings risk

You have three choices for a position going into a report:

1. Exit before the report and re-enter afterwards if your rules still say yes.
2. Hold a smaller position sized for a gap rather than for your stop.
3. Hold the full position and accept that the loss can exceed your plan.

Position sizing is covered fully in position sizing and stop-losses.

After the gap: drift

Academic research going back to Ball and Brown (1968), and later Bernard and Thomas (1989), found that stocks tended to keep drifting for weeks in the direction of a large earnings surprise. This is known as post-earnings announcement drift. Later studies suggest the effect has been weaker in large, heavily traded stocks. Treat it as an idea to test, not a rule to trade.

Next, the second half of the course's analysis toolkit: how to read stock charts.