Profit Pregame

Why Earnings Beats Reaching Historic Levels Could Be Dangerous

If it seems like every earnings report you read about these days involves the company’s performance exceeding expectations, you’re not crazy.

It’s been a busy week of earnings reports. With even more earnings beats from big names like Apple, Inc. (AAPL), Amazon.com Inc. (AMZN), Domino’s Pizza, Inc. (DPZ), Caterpillar Inc. (CAT), and more, we’re now in uncharted waters.

And traders need to be careful.

The number of companies that have beat earnings expectations this year, and the degree to which they are overachieving, are at record highs. Research indicates that over 86% of S&P 500 companies reporting earnings beat analyst expectations by an average of 23.5%.

But before you start throwing every bit of capital you have at what appears to be an outperforming market, consider this…

Analysts that determine what Wall Street’s expectations are have been flying more blind than usual.

Due to the unprecedented effects of the COVID-19 pandemic, many companies pulled their forward guidance this year. That lack of information may be at least partially responsible for the breadth and depth of the earnings beats we’ve seen so far this year.

So, until we get back to a point where expectations are more informed and accurate, take outsized earnings beats with a grain of salt.

Trading tip of the week

Volatility creates opportunity.

Some traders shy away from it, but I love when the market goes up and down and moves a lot.

Down days give me an opportunity to get into trades cheaper, and up days are when I bank profits.

Learn to trade around volatility instead of avoiding it, and watch your gains increase.

Earnings report to watch

On Wednesday, we get yet another earnings report from a company that has likely benefitted from the conditions caused by the pandemic.

The company’s digital payments platform is expected to have seen a steady increase of users and revenue from a shift in the way people exchange money caused by COVID-19.

Even in-store digital payments have reportedly increased, which should boost PayPal’s bottom line even more.

But with expectations running so high for the stock that has more than doubled over the last year, I believe it will need a significant beat in order to push it higher.

The Fools are Rushing In…

Every day, amateurs are dumping millions of dollars into the markets with no experience, strategy, or tools to speak of.

They see outsized earnings like these and immediately go all-in.

While these newbies are basically just throwing darts in the dark, pattern trading expert Tom Gentile is taking advantage of the incredible rise in trade volume and stock prices with the help of his new brute-force algorithm.

During testing, Tom’s trading algorithm uncovered opportunities for 300% in 3 days… 471% in 19 days… even 650% in 8 days!

As more and more amateurs dump speculative money into the markets, the incredible results we’ve already seen could just be scratching the surface. Full story here.

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