Corporate earnings are the underlying financial fundamentals that drive price targets for public companies. They report on how much money a company is making versus how much it is spending. This information influences trading, with positive reports lifting stock prices while disappointing ones triggering selloffs. Earnings are also the basis for calculating market index values, and as such, can cause significant volatility in the markets.
In the simplest terms, earnings (also known as profit or net income) are a company’s revenues minus all costs. This figure is reported quarterly by publicly traded companies to the Securities and Exchange Commission, and it’s this data that investors and traders rely on to make decisions.
The metric that is most closely watched is Earnings Per Share (EPS), which divides the total amount of earnings left over by the number of outstanding shares, offering insight into per-share profitability. Companies may also provide guidance on expected EPS for future quarters, which can help shape market expectations and investor sentiment.
Aside from being a necessary requirement for publicly traded companies to disclose, earnings can reveal broader industry and economic trends. For example, strong earnings can indicate that consumer spending is healthy, while weak earnings might suggest that businesses are struggling. In addition, profits tend to outpace employee compensation over time, reflecting a growing economy. This trend can have important implications when central banks decide on interest rates and monetary policy. Earnings are one of the few leading indicators that can predict a recession before it occurs, although other factors such as unemployment claims, factory orders, GDP, housing permits and retail sales data also play a role in assessing economic trends.