Earnings calls offer valuable insights into a publicly traded company’s financial health, performance metrics, and future outlook through direct communication from management to investors and analysts. These quarterly events often provide context and commentary that go beyond the raw numbers found in financial statements, and they can have a significant impact on stock prices, presenting potentially attractive opportunities for traders.
However, buying stock before earnings calls involves calculated risk and requires a thoughtful understanding of the potential outcomes.
Trading Before Earnings Calls: Why Some Investors Take the Risk
Some investors choose to buy shares just before an earnings announcement in anticipation of the company outperforming expectations. This strategy hinges on the belief that a positive earnings surprise—such as stronger-than-forecast sales or profits—could trigger a rise in the stock price. Often, this expectation is fueled by analyst forecasts, market sentiment, or other indicators suggesting upbeat results.
While this pre-earnings positioning can lead to quick gains if the company beats expectations, it can also backfire. If the company misses estimates, merely meets expectations, or delivers a cautious forecast, the stock could decline sharply—sometimes even if the numbers themselves are not bad.
A November 2024 study published in the Journal of Behavioral Finance found that retail investors—particularly those using the online discount brokerage Robinhood—frequently increase their positions in the days and hours leading up to earnings announcements, especially for high-profile stocks that receive substantial media attention.
“We find strong evidence that, immediately around earnings announcements, Robinhood investors’ behavior is primarily driven by attention-induced noise trading,” the researchers concluded.
Additional research confirms that this behavior is often rooted in short-term, attention-driven decision-making, rather than strategic analysis or informed forecasting.
Pros and Cons of Buying Shares Ahead of Earnings
Pros:
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Potential for quick gains if earnings beat expectations
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Opportunity to ride pre-announcement momentum
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May benefit from market enthusiasm around widely watched stocks
Cons:
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High risk if earnings disappoint or underwhelm
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Stocks may decline even after meeting expectations due to market overreaction
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Retail investors often engage in reactionary, attention-driven trading, which may lead to subpar returns
Indeed, the 2024 study cited earlier observed that Robinhood users tend to "swarm into stocks with pending earnings announcements and lose interest in the same stocks immediately after the announcements." The study concluded:
"There is little evidence that their trading around earnings announcements yields any profits."
A related study examined herding behavior—when a large number of investors simultaneously pile into a stock, often driven by hype rather than fundamentals. It found that such herding, especially around earnings calls, tends to result in negative abnormal returns for retail traders.
In summary, while trading before earnings calls can offer substantial upside for well-informed investors, it also exposes traders—especially retail participants—to heightened risk and emotional decision-making. Success in this strategy requires more than just optimism; it demands careful fundamental analysis, technical insight, and a disciplined approach to risk management.
