There are four periods during the year when the investment world, especially in the USA, is buzzing with excitement, and that is when companies report their quarterly earnings. We are currently in the second quarter, or Q2 reporting period and things are going great. “Magnificent Seven” titans Microsoft and Meta rose about 8% and 11% respectively in pre-market trading on Thursday last week, on the back of better than expected quarterly earnings. Software giant Microsoft said that annual revenue from its cloud computing service Azure exceeded $75 billion. Meta issued an upbeat third-quarter sales outlook, surpassing the Street’s estimates. Even though fellow Mag-7 names Apple and Amazon reported better earnings than the Street expected after the bell Thursday, their prices dropped a bit.
The reason why earnings are so important is the fact that for the last 25 years there has been a 98% correlation between the share price and the earnings of a company. If earnings go up, so will the share price, and that is why it is vital for you as an investor, to not get distracted by the day-to-day mumblings and rumblings causing volatility in the price of the share you own, but to look through the noise at the profitability of the company over the longer term.
We know that evaluating the earnings of a company every three months is way too short, so we would not advise you to act on any good or bad quarterly results, but it might create some buying or selling opportunities if you are waiting for a time to do something about your portfolio. As JWR clients you would have most of your funds invested in unit trust funds so it is not your responsibility to buy and sell shares. That job falls on the fund manager of the unit trust, so that person will be watching the earnings reports very closely. If, however, you develop any interest in dabbling in direct equities, especially if you are a younger investor, by starting small and following the business news and earnings reports, you will create an asset in yourself (your ability), a reward of which you will reap the benefits for decades to come.