Amit Das
In the US, all publicly listed stocks are required to release earnings reports on a quarterly basis. These reports contain important information relating to the company’s operations and performance. The reports give clarity to the company’s financial position as well as giving guidance on what to expect in the future. Given that these reports release highly relevant information for company valuations that were previously only speculated on, earnings season is always a crucial period that leads to significant price updates for most stocks. This insight will delve into:
- The market impact of earnings releases.
- News activity surrounding earnings season.
- The relationship between news coverage and post-earnings price trends.
Throughout this insight, we focus on highly liquid stocks ($50m+ daily volume) to ensure that learnings are representative of realistic trading opportunities.
The market impact of earnings
In the US, quarterly earnings reports are only allowed to be released outside of regular trading hours. This regulation in itself, hints at the volatility around a company’s earnings report as the aim of the regulation is to prevent overreactions immediately after a report is released. Holding close-to-close over an earnings release is a highly risky proposition as stocks can experience huge price adjustments over this window. As such, this insight focuses on the price movements from the close after an earnings release, as this is likely to be more tradable given standard risk preferences.
Often, the initial reactions to earnings reports are based on whether a company has “beat” or “missed” its Earnings Per Share (EPS) estimates, given by external analysts. However, reports contain lots of information beyond realised EPS that requires a more detailed look, i.e. more time, to fully account for. As such, even though lots of the earnings-related volatility occurs over the first trading block following earnings, greater-than-average price movements do persist in the days following this initial reaction based on the increased scrutiny that earnings reports are subject to in the following days.
Figure 1: Average absolute returns of stocks over various time periods
As can be seen above, over the 1-10 days following the initial reaction to a company’s earnings report, we see almost double the average absolute price move of listed securities.
Earnings season news coverage
News coverage is a key source of data when reacting to new information that might be highly relevant to a company’s value. News data has the appealing quality of being related to both the direction and scale of price adjustments. In times of significant new information, news quantity for a company, sector or region will be high and highly polar based on whether we are seeing good or bad news.
In order to examine the relationship between earnings and news coverage, results are drawn from LSEG’s News Analytics data feed. This news feed provides easy-to-digest indicators on a continuous time basis that draws out articles which are relevant to the tagged company. Records provided in the News Analytics feed come with pre-existing tagging and sentiment analysis so that signals can be easily generated.
One key observation of all types of news data is that it is relatively sparse, when looked at on a per ticker basis. As shown in figure 2, only around 10% of listed companies receive news coverage per day. This is because news records will correspond with the news cycle. If there is no novel information being released for a company, that company won’t have any news written about them. Digging deeper, lots of companies tend to dominate the news cycle. As such, if you are one of the companies outside this set, we can expect that you have less than a 10% chance of appearing in the news cycle on any given day.
However, this likelihood significantly increases following an earnings report. As we can see, roughly 45% of companies receive direct coverage in the News Analytics feed between the release of their earnings report and the subsequent close. From this, it appears that news data is highly responsive to earnings releases and should provide ample signals to give traders a wide range of opportunities to select from.
Figure 2: Percentage of companies that typically receive news coverage on a daily basis vs after releasing an earnings report
News as a predictor
Of course, simply having a good throughput of signals is not sufficient. The most interesting aspect is whether we can use these signals as a predictor. Aggregating the News Analytics between an earnings release and the following close allows us to generate a summary signal representing market sentiment around a company’s earnings report. Figure 3 shows the promise in using these signals as a predictor for post-earnings drift. We see a positive relationship between the news sentiment directly after earnings and the price movements the following day.
Figure 3: Average close-to-close price move following an earnings release
Whilst news coverage is invaluable for capturing immediate market sentiment, it often only scratches the surface of a company’s financial health. Official filings provide deeper insights into operational performance, risk factors, and forward-looking guidance. By blending sentiment signals from news analytics with textual analysis of these detailed disclosures, investors can uncover subtler indicators - such as shifts in management tone or newly disclosed risks - that might otherwise go unnoticed. This combination of real-time news flow and comprehensive regulatory filings enables more robust and nuanced trading strategies that better anticipate post-earnings price movements.
All in all, earnings season presents many great opportunities to take advantage of high levels of volatility. LSEG’s News data feeds offer a robust source of alpha during this crucial period. By leveraging news sentiment and its predictive capabilities, investors can better action on post-earnings price movements and identify opportunities in an otherwise challenging landscape.
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