Midday Market Update

Investors Turn Their Attention to Earnings Reports

Manjul Bhusal Sharma

U.S. stocks were higher as the Dow hit the 20,000 mark in intraday trade today. The gains came after President Trump signed executive orders to proceed with the construction of Keystone XL and the Dakota Access pipelines. The S&P was up 0.62% and Nasdaq edged up 0.75%. Asian markets ended the day in the green. The Nikkei 225 and Sensex gained 1.43% and 1.21%, respectively. European stocks followed suit and ticked higher. The DAX gained 1.82%. Not surprisingly, gold was trading in the red at about $1203.10 per ounce. The quarterly earnings report season is upon investors now, as analysts, investors, and traders are busy looking for information to make sound decisions about the companies they follow.

As companies release information about revenues, profits, and earnings per share, many investors react--even when a reaction is not warranted. Investors are comparing a company's results not only to its competitors but also to analyst estimates. Because a majority of investors have a tendency to react to any surprises in the earnings, companies have an incentive to talk down expectations and get any bad news out well ahead of earnings announcements. At times, there is so much focus on talking down expectations that the market almost expects major companies to beat estimates by a small margin. This is not to say that the numbers in an earnings report are not important. The value of any company, regardless of the industry it is in, depends on its capacity to generate real cash flow. So, investors who pay attention to the microeconomics of specific securities use earnings reports to reassure themselves of their valuation of a company. The macro fundamentalists, on the other hand, look at reports of multiple companies and try to notice the challenges affecting different industries and the economy. Their approach is sometimes called the top-down approach, an approach of looking at the economy holistically and then working down to specific companies. When  Alcoa (AA), the world's third-largest producer of aluminum, released information that it lost about 68 cents per share in its first quarterly report as a stand-alone company, some macro fundamentalists concluded that it didn't matter as much because they expect the construction sector do well under President Trump. When adjusted for one-time expenses, Alcoa earned 14 cents a share, missing Bloomberg's estimate of 20 cents.

Manjul Bhusal Sharma does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.