Stock Returns During and Between Earnings Seasons

A reader proposed the following stock market timing strategy based on a strictly calendar-based definition of earnings season: go short (long) the market at the close at the end of the first full week (sixth full week) of each calendar quarter, representing the beginning (end) of earnings season. The hypothesis is that the broad stock market performs poorly during earnings season and well outside of earnings season. Using weekly closes of the S&P 500 Index as a proxy for the U.S. stock market from the beginning of 1950 through 10/7/11 and of SPDR S&P 500 (SPY) and ProShares Short S&P500 (SH) for 6/23/06 (inception of the latter) through 10/7/11, we find that:

The following chart shows average returns for the S&P 500 Index during and between earnings seasons for four historical periods:

• Since 1950 (247 observations)
• During 1950-1989 (160 observations)
• Since 1990 (87 observations)
• Since 2000 (47 observations)

Periods between earnings seasons tend to generate greater returns than do earnings seasons. Results generally do not support shorting the market during earnings season, but the average earnings season return since 2000 is negative. 

Since earnings seasons are on average about three weeks shorter than the intervals between earnings seasons, an interval comparison may mislead. What happens if we normalize based on average returns per week during and between earnings seasons?

The next chart shows the average normalized (per week) returns for the S&P 500 Index during and between earnings seasons for the historical periods used above. There is no consistent difference in average stock market returns per week during and between earnings seasons.

In case these aggregations miss some more granular pattern, we consider average returns by week across an earnings season-based quarter.

The next chart shows average returns for the S&P 500 Index by week during earnings seasons (weeks ES-1 through ES-5) and between earnings seasons (weeks BES-1 through BES-8) for the historical periods used above. There is some indication that the second and last weeks of earnings season and the first and sixth weeks between earnings seasons tend to be weak.

Since the above charts show small negative returns during earnings season for recent data, we conduct a short direct test of an earnings season timing strategy.

The final chart compares over the available sample period evolutions of: (1) an Earnings Season Strategy that switches from SPY between earnings seasons to SH during earnings seasons (with no switching frictions); and, (2) buying and holdings SPY. The Earnings Season Strategy mostly underperforms, and adding switching frictions would weaken its performance.

The average weekly return of the Earnings Season Strategy is 0.04%, compared to 0.06% for buying and holding SPY. Standard deviations of weekly returns are approximately the same.

In summary, evidence from simple tests does not support a belief that a strategy of going short (long) the broad stock market during (between) earnings seasons reliably beats, or even matches, a buy-and-hold strategy.

Cautions regarding findings include:

• The S&P 500 Index subsample since 2000 is small for reliable inference, as are (especially) the SPY and SH samples since June 2006.
• Week-by-week results are particularly subject to data snooping bias (luck), such that results for extreme weeks likely overstate reasonable out-of-sample expectations.

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