The earnings season offers above-average profit opportunities due to the short-term increased volatility of share prices. Momentum and timing are essential prerequisites for high profits. If traders can predict the direction of share prices before the key figures are published, high profits can be made. However, increased volatility also entails increased risks.

The question is, how can you use the earnings season to capitalize on the increased momentum in share prices?

In this article, we show you how to significantly increase the probability of profit and profit on earning trades.

American companies publish their quarterly results during the earnings season every quarter. Analysts evaluate and assess the key figures. The development of key figures is evaluated from quarter to quarter, and a comparison is also made with the previous year's quarters. The comparison with last year's quarters shows a more accurate result, especially regarding seasonal business models.

Share prices are more volatile during this period. Traders' returns can be heavily influenced by how the market reacts to a company's earnings report.

It is not unusual for a share price to rise or fall significantly immediately after an earnings report.
Few things affect stocks as much as the release of corporate earnings.

When companies publish their key figures, the share price reacts to various aspects. Basically, there is always an interplay between the market's expectations and the figures published by the management.
Two areas have the most significant influence on share price performance.
The first is earnings per share and free cash flow. If expectations are exceeded, this is a good sign. The key figures are an indication of the quality of the management. If the statistics consistently exceed expectations, it can be assumed that the company management is doing a good job.

The biggest influence on earnings' price movement is management's outlook for the future. Because the stock market trades the future, it is easy to understand why analysts attach particular importance to this. If management's prospects are higher than the market's expectations, this is the best prerequisite for rising share prices.

The following chart shows Microsoft's earnings per share (white) and the market's expectations (green). Earnings were almost always above market expectations.

The extent to which share prices rise or fall depends on the percentage deviation of the key figures from expectations. Different percentages are required to trigger significant price movements depending on the sector and industry. For "boring" value stocks, even low, double-digit percentage values are sufficient. For dynamic growth stocks, on the other hand, higher percentage deviations are not uncommon.

Now that we know what moves share prices when the key figures are announced, the question is how to put this knowledge into practice profitably. Because trading earnings presents a few challenges.

Earnings are continuously published outside trading hours. Therefore, it is not possible to react to significant price movements that you would like to take advantage of as a trader. You, therefore, have to position yourself before the figures are announced.

To assess the direction of the price movement, you need to evaluate whether the key figures exceed or fall short of market expectations, how management views the company's future, and whether the corresponding outlook is in line with market expectations.

If the forecast between expectation, reality, and outlook were simple, earnings would lose their volatility. This is because, under this assumption, financial analysts would also achieve better hit rates and their forecasts would be closer to reality. As a result, share prices would no longer move as much when earnings are published and traders would lose out on the strong price movements. It is therefore a good thing for traders that earnings can be predicted rather poorly on the basis of key figures, as this is the only way to achieve increased volatility and greater opportunities for profit.

To solve this problem, we should change our perspective on the subject.

The following thought: If a company causes share prices to rise by exceeding market expectations, then this is an indication of a good company and good management. If a company has repeatedly exceeded market expectations in the past, there is an increased probability that this will happen again in the future!

Based on this view, we look for recurring price patterns during the publication of key figures. Recurring price trends are the basis of many trading strategies and a common approach to identifying statistical advantage. Whether you use indicators, seasonal patterns, or event-based trading. All are based on the assumption that past price movements will be repeated in the future.

But which companies have regularly outperformed market expectations in the past? The answer is provided by analyzing historical data on the publication dates of key figures.

Let's take a look at an example. How often and when did Microsoft shares benefit from rising share prices during the earnings season?

Let's first take a look at the average development of the share price in the individual quarters.

The following chart shows the time of publication of the earnings in the middle as a vertical line and the average price development for the earnings per quarter 40 days before and 40 days after the event.

Earnings cause different price movements per quarter. Therefore, the question arises as to how high the probability is of achieving rising prices in the individual quarters and when is the best entry and exit time?

We have backtested various entry points per quarter and determined the best result per quarter in the following table.

We use the Sortino Ratio to assess the trades. This ratio is ideal for assessing the quality of a backtest's profit curve.
It is easy to see that the first and fourth quarters offer the best opportunities.
Therefore, for the fourth quarter, it would be a good trade to enter on the trading day before earnings and close the trade after 13 trading days.

Let's switch sectors and examine UnitedHealth shares. UnitedHealth (UNH) is one of the largest health insurers in the US and has shown solid growth in recent years.

The average share price performance around the time of quarterly earnings releases shows that the fourth quarter in particular could be interesting.

Let us deepen the analysis and exclude the first to third quarters in order to obtain more detailed data for the fourth quarter.

The chart clearly shows that an upward trend begins a few days before earnings and continues after the figures are announced.
If you set the backtest (blue) to the optimum entry and exit time, you get the following result.

Anyone who entered 12 trading days before the Q4 earnings and held the trade for 19 trading days achieved an average profit of 9.35% over the last 10 years, with a hit rate of 100%.
The backtest result of the individual trades is as follows.

Let's analyze the Adobe share.
The view shows a strong upward trend in the second quarter.

For more detailed results, we exclude the other data and perform two backtests.
In the first backtest, we start the trade one trading day before earnings and hold it for 20 trading days after earnings.

The backtest leads to the following result:

With a 90% hit rate and a history of 10 years, we achieve nine winning trades and one losing trade. The individual trade results show that the losing trade occurred in 2022 and caused a loss of 0.45%.

For a second backtest, we start the trade 26 trading days before earnings and exit again 20 trading days after earnings.

The backtest produces the following result.

The aim of every strategy is to successfully repeat trades, minimize risks, and exploit the compound interest effect as much as possible in order to maximize profits.

The examples show impressively that a detailed analysis of price movements in earnings can significantly increase the probability of profit. Successful repeatability is possible with the appropriate statistics and analyses.

Diversification of different companies makes risk minimization possible. Implementing several trades per earnings season increases the strategy's profit probability.

No stock market strategy is free from risk. Even earning trades, which have an increased hit rate thanks to statistical analysis, are no exception.

Experience has shown that the earnings strategy described works very well in "normal" stock market environments. Caution should be exercised in bear markets and recessionary environments.

In practice, analyzing and searching for trading opportunities is often very time-consuming and resource intensive.

One way to solve this problem is our Earnings Essential offering, which consists of an earnings analyzer and an earnings screener. Both tools specialize in implementing the analysis described above and identifying stocks with increased profit potential.

The earnings screener regularly searches through over 10,000 stocks and carries out numerous backtests. You can filter and analyze the screener results according to your needs.

If you are interested, you can test our Earnings Essential offer free of charge for 7 days.