Earnings Season Catalyst Drives Stock Market


Simpler Trading Team

7 min read

In this article:

  • A combination of catalysts kicks off this week
  • Bear market changes trading for earnings season
  • How crude oil impacts inflation across the board

Catalysts are driving this market and many traders often overlook a significant, repeating event that impacts the stock market – earnings season.

Simpler’s traders closely follow the earnings season which occurs quarterly.

This season, which kicks off this week, is an all-new environment based on the bear market.

(Check out the free video, above, for insight into trading this changing market.)

Earnings season catalyst drives trading

What are catalysts that drive the market?

Catalysts that affect the market include inflation, rising interest rates, consumer sentiment, supply chain issues, Federal Reserve (Fed) policy, and earnings season.

Each or a combination of these can influence market reaction – negative or positive – based on news or events related to the catalyst.

A combination of catalysts to watch this week is how inflation is expected to impact earnings season.

Inflation data keeps market on edge

Inflation has infiltrated almost every aspect of consumer sentiment and trading psychology in the past few months.

Continued and elevated inflation levels have pushed “preparing” for a recession as the Fed tries to tame inflation. The Fed seems to be behind in its efforts, and behind the eight ball, as the trading world preps for impending releases of the latest inflation data.

The Core Consumer Price Index (CPI) is set for release Wednesday morning. Expectations are that June numbers – originally estimated to drop – may surpass the 8.6% surge in May. This was a 40-year high.

The CPI measures consumer costs for important staples such as housing, gasoline, utilities, and food.

Inflation data continues Thursday when the U.S. Producer Price Index (PPI) is released. The PPI tracks the change in wholesale cost – the price of goods sold by manufacturers. And, Friday will bring the U.S. Retail Sales report and Consumer Sentiment – all numbers closely watched by the Fed.

All of this inflation and consumer data is hitting the news, and the stock market, the same week as earnings seasons kicks off. Major corporations are expected to report earnings starting Friday.

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Bear market wiped out bullish runs

The second quarter earnings season starting Friday is expected to be bearish considering all the inflation data and first quarter results.

Danielle Shay, Vice President of Options at Simpler Trading, expects inflation to be front and center as earnings reports begin to roll out and impact the stock market.

In the previous bull market, earnings was a favorite catalyst for trending moves to the upside. Traders could start weeks before earnings season, watching for trade setups that were a “run into earnings.” Growing companies would share the strength of operations and price would tick upward as the report release approached.

The bear market killed this upward run because companies started noting how economic issues, like inflation and supply chain problems, were negatively affecting operations and profits.

The first quarter earnings reports this year were awash with the market reacting negatively, even if companies reported strong earnings but the market was expecting higher results. As this bear market process played out, the major indexes – Dow, Nasdaq, S&P 500 – trended further down.

Even if traders are not looking for earnings season trades, they should keep these catalysts in mind because of the overall impact against the market.

Consider the high price of crude oil. This one commodity sends inflation shock waves through most sectors of corporate earnings.

“That is absolutely an impact that we’re going to see through earnings,” said Danielle. “There is a wide variety of companies that have to deal with transportation costs.”

The high price of crude oil translates to high gas and diesel prices which in turn raises the cost of transportation and operations for companies. The end result is shrinking profits – earnings – and higher prices for the end consumer.

This combination of catalysts – cost of business and consumer inflation – sets up a bear market earnings season.

Add in other contributing factors, such as a strong dollar impacting earnings, and this market could get messy quickly. As an example, Microsoft (MSFT) had to revise earnings to the downside due to the strong dollar affecting its overseas operations. A strong dollar equals higher costs for companies with overseas investments.

Microsoft is also connected to the semiconductor sector which has been trending down, and both of these are heavyweights in the major indexes.

Companies in the transportation sector are also impacted by the inflation catalyst which also bleeds into the consumer discretionary sector (non-essential consumer products).

All of this shows how a combination of catalysts is setting up a potentially messy earnings season that could send the market further downward.

Finding earnings season trade potential

There are three phases traders should understand when trading earnings season.

This bear market shift has prompted Simpler’s traders to watch for downward movement and not commit to bullish run into earnings plays.

Learn these key phases of earnings season:

  • Pre-earnings – Run into earnings setups have changed with the shift from a bull to a bear market. Tickers can move up or down or simply chop along compared to past environments where the “run up” in price was expected.
  • Earnings release – As always the report can send a stock price moving against a pre-earnings position. Even if a company beats earnings, it may not be “enough” for the market which can send the price unexpectedly tumbling.
  • Post earnings – Once any big move occurs after the earnings report – up or down – price can move steadily one way or the other. Many traders wait until after the earnings report to consider a trade setup.

Each phase has advantages and disadvantages for traders working through this market uncertainty.

Learn more about trading earnings season as this volatile time period gets underway.

Plan to trade earnings season impact

Traders need to adjust trading strategies to work through this earnings season.

Danielle focuses on chart patterns and specific trade setups based on past earnings performance and current company performance, as well as market expectations for the company.

Her experience trading earnings season reveals that this bear market will – influenced by catalysts – impact earnings season differently.

As earnings season kicks off, traders should plan and research as much as possible leading into release of the reports. There are possibilities for trading through the reports, but these trades can be risky. Once earnings reports are released there can be opportunities for trading based on the positive or negative movement in stock price.

The key is to keep specific companies in the watchlist and follow through when indicators show potential trades setting up on the charts.


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