What Are Earnings Reports and Why Should I Care?

Earnings season is upon us again! Simply put, U.S. earnings reports show how much profits companies have made in the past quarter compared to the previous one. In case you’re wondering why these reports matter in forex trading, I’ll give you three simple reasons:

1. These could affect risk sentiment.

Let’s face it. The U.S. budget showdown is hogging the spotlight these days and has been driving risk flows crazy! The upcoming earnings season could provide a nice break from all the debt drama and allow market watchers to zoom in on how large U.S. companies have performed in the past months.

As discussed in our lesson on intermarket correlations, strong earnings figures typically translate to stock market gains. In turn, a rally in equities boosts traders’ appetite for riskier assets and higher-yielding currencies.

2. There hasn’t been much data from the U.S.

Thanks to the budget impasse, the U.S. government is close to marking its second week in a shutdown. Ever since the non-essential services have been paused the other week, some government agencies have been unable to collect data and release some of their reports, such as the NFP.

With that, forex traders have very little clues to go by when it comes to assessing how the U.S. economy has been performing lately. Earnings reports could give traders an idea of which sectors have been doing well and which ones have been lagging behind.

3. These hint at the fate of the U.S. economy.

In addition to revealing how the U.S. economy fared in the past months, earnings data could also help market watchers figure out whether the outlook is promising or not. After all, the ongoing government shutdown and potential budget cuts are likely to make a dent on spending for the last stretch of 2013, so it would be interesting to see if companies can afford to shoulder additional losses later on.

Weak earnings figures could mean that the U.S. economy is in for a world of pain until the end of the year, as these might also hurt consumer confidence and convince average Joes to just keep their hands in their pockets. Business confidence could also take a hit and companies could even scale down operations if demand is down.

There you have it, fellas! These reasons should be enough to encourage you to keep close tabs on earnings releases, particularly for the larger and well-known U.S. companies. Do you think we’ll see strong earnings for Q3? Let us know by voting through the poll below!

Do you think we’ll see strong earnings for Q3?