Exactly How Significant is Earnings Season?

Losses can be much more substantial during earnings season versus the off-season

Senior Quantitative Analyst
Apr 22, 2015 at 8:04 AM
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We usually define the beginning of earnings season when Alcoa (AA) reports its results, which happened a couple of weeks ago. We consider the end of each earnings season when Wal-Mart Stores (WMT) releases its earnings, which should happen in about four weeks -- on Tuesday, May 19. A large portion of earnings reports are unveiled between the releases of these two major companies. This week, I'm taking a look to see how the market behaves during earnings season compared to other times. Naturally, I would expect to see more volatility as the market absorbs the performance figures and guidance divulged during the period. We'll see if the numbers confirm that, and if they reveal anything else interesting

Holding During Earnings: We have earnings data since 2006, which works out well as it captures both a bear market and a bull market. First, I wanted to see if you could have a better return by holding stocks only during earnings or only other times.

The chart below shows how you would have done starting with $100, and investing in the S&P 500 Index (SPX) since 2006. If you simply held the index since then, your $100 would be worth about $165. This easily tops holding during the earnings season or only holding in the off-season. The returns seem to be simply a function of time invested in the market. The buy-and-hold strategy is best because you're always invested, and the market has gone higher. Holding in the off-season is next best, since there's more time invested when compared to earnings season.


Comparing Daily Returns During Earnings Season vs. Off-Season: The table below summarizes the daily return data of the S&P 500 during our defined earnings seasons versus the off-seasons. I would say whether it's earnings season or not is pretty insignificant when it comes to the performance of the S&P 500. The average return during earnings season is 0.032% and 0.030% when not during the season. The percentage of positive days is just a hair better during the earnings season.

As expected, the table shows a bit more volatility during earnings season. The standard deviations of daily returns during earnings season is 1.38% compared to 1.28% otherwise. This translates to annualized standard deviations of 22.0% vs. 20.4%. Another way to measure volatility is to look at the average magnitude of the daily return which is simply the absolute value of the return each day. During the major reporting period, the average absolute move is 0.867% vs. 0.832% at other times.

What I found most interesting in the table below is the average positive and average negative. During the earnings season, the average positive is just 1.1% higher than the average positive during the off-season (0.806% vs. 0.797%). However, the average negative during earnings season is 8.0% lower than the off-season (-0.943% vs. -0.873%). This suggests that during earnings season, the market is especially susceptible to big drops on a daily basis compared to other times.


Last Four Weeks of Earnings Season: So far, earnings season has been pretty good. Since AA reported earnings after the close on Wednesday, April 8, the S&P 500 is up about 0.70%. I wondered if a good start to earnings season boded well over the last few weeks or not (our earnings season as defined is typically around six weeks long). Specifically, I looked at how the S&P 500 performed over the last four weeks of earnings season depending on how it did over the first two weeks. Unfortunately, the market tends to mean-revert, meaning when it's up the first couple weeks, it tends to head lower, on average, and when it's down over the first couple weeks, it tends to rebound.

When the market sees gains over the first couple weeks of earnings season, it averages a decline of 0.25% over the rest of the period. It's positive most the time (56%), but still averages a loss because the average positive return is just 2.32%. When the rest of the period is negative the loss averages a decline of 3.52%. This might suggest that when the market adjusts to positive earnings surprises early in the season it makes positive upside surprises harder to come by later in the season.




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