Corporate Earnings

Corporate earnings drive stock prices. Earnings essentially indicate how profitable a company is and is a contributor to where the share price will head.

Recent tax cuts will help corporate earnings as taxation is a major expense for most companies. Theoretically, this will drive companies to invest more in building their business to drive further economic growth. In classic trickle-down theory, this will lead to job creation.

Earning assessments have been driven down recently by tariff fears and that has begun to show up as justified as companies report earnings. We expect this to continue until tax cut tailwinds kick-in.

Most headline drama in the market center around companies beating or missing earnings. Understanding the importance of earnings reports can help you make sense of the fluctuations that happens in stocks on a short-term basis

We watch earnings very carefully. The entire research team at DWM is focused on understanding the financial fundamentals for companies as this drives price targets.

See below for a quick overview of corporate earnings.

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“What Are Earnings?

A company's earnings are, quite simply, its profits. Take a company's revenue from selling something, subtract all the costs to produce that product, and, voila, you have earnings! Of course, the details of accounting get a lot more complicated, but earnings always refer to how much money a company makes minus costs. Its many synonyms cause part of the confusion associated with earnings. The terms profit, net income, bottom line, and earnings all refer to the same thing.

Why Care About Earnings?

Investors care about earnings because they ultimately drive stock prices. Strong earnings generally result in the stock price moving up (and vice versa). Sometimes a company with a rocketing stock price might not be making much money, but the rising price means that investors are hoping that the company will be profitable in the future. Of course, there are no guarantees that the company will fulfill investors' current expectations.

The dotcom boom and bust is a perfect example of company earnings coming in significantly short of the numbers investors imagined. When the boom started, everybody got excited about the prospects for any company involved in the Internet, and stock prices soared. Over time, it became clear that the dotcoms weren't going to make nearly as much money as many had predicted. It simply wasn't possible for the market to support these companies' high valuations without any earnings; as a result, the stock prices of these companies collapsed.

When a company is making money, it has two options. First, it can improve its products and develop new ones. Second, it can pass the money onto shareholders in the form of a dividend or a share buyback. In the first case, you trust the management to re-invest profits in the hope of making more profits. In the second case, you get your money right away. Typically, smaller companies attempt to create shareholder value by reinvesting profits, while more mature companies pay out dividends. Neither method is necessarily better, but both rely on the same idea: in the long run, earnings provide a return on shareholders' investments.

Earnings are ultimately a measure of the money a company makes and are often evaluated in terms of earnings per share (EPS), the most important indicator of a company's financial health. Earnings reports are released four times per year and are followed very closely by Wall Street. Investors can track the schedule of earnings reports for publicly traded companies through their broker, the Nasdaq calendar, and the SEC's EDGAR system. Growing earnings are a good indication that a company is on the right path to providing a solid return for investors.”

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Source: https://www.investopedia.com/articles/basics/03/052303.asp