Fearful investors might well be watching the upcoming earnings season from behind the sofa, but it’s sure to be an action-packed feature if you’re brave enough to keep your eyes open. So grab your popcorn, and maybe prepare for a couple of jumpscares: here’s your spoiler about what you should pay attention to – and what you can fast-forward through – this earnings season.

1. Ignore the headlines and focus on the future.

Here’s the thing: actual reported profits don’t matter all that much. Ultimately, last quarter’s figures are already yesterday’s news by the time they’re reported, and investing is all about looking forward, not backward. You’ll often see stock prices move in a way that doesn’t seem to fit with a company’s results – like whether they beat or missed expectations. That’s because investors aren’t purely judging on the past, but also on how outlooks have changed and what they expect for the future.

One catalyst that drives a change in outlook is when a company’s management updates its guidance – that’s things like its revenue and profit forecasts. See, that usually prompts analysts from firms like Goldman Sachs (GS) or JPMorgan (JPM) to change their own estimates, and it’s those fresh predictions that move stock prices after an earnings report. Tuning into company-hosted conference calls is a direct way for you to unearth management’s latest guidance: you can find replays on the investor relations (IR) section of most firms’ websites.

You can see the link between stock prices and estimates in the chart below: it maps the price of the S&P 500 (blue line) against analysts’ 12-month forward EPS – that’s “earnings per share” – forecasts (black line) for the companies in the index. In good times, companies raise their forecasts, analysts tend to follow suit, and stock prices move almost hand in glove.

Source: FactSet

Take another look at that chart, and you’ll notice that the S&P 500’s price has historically fallen before companies cut their forward estimates. That’s because markets do a pretty good job of predicting what's to come before companies and analysts have even had the chance to change their outlooks. So in short, don’t get hung up on the beats and misses: tune into what management predicts for the future instead.

For Q3 earnings: The S&P 500 is flashing a warning to expect forecast cuts. After all, bosses are likely to cite challenges like rising costs, the strong dollar (which cheapens the money companies make abroad), and a weakening global economy as reasons to take a conservative approach when they update their outlooks.

Firms will stand out as stronger than most if they stick to their full-year targets and offer some comforting words about the year ahead. But on the flip side, you’ll want to watch out for management bemoaning current macroeconomic issues. Sure, investors will expect some of that from companies that are particularly vulnerable to global economic headwinds, but they likely won’t give the same pass to any supposedly defensive businesses – those that should be shielded from the worst of the winds – that blame the environment for their lower outlooks.

2. The most important thing is to keep the most important thing… the most important thing.

Investors tend to have a prevailing “key driver” for each company they’re interested in: that might be the growth of a business division that’s central to a firm's future, or a company’s ability to navigate a topical issue like today’s inflationary environment. But since there’s no one-size-fits-all rule, it can be tricky to pick out that specific key driver for each company. So you might want to take a look at conference calls from previous earnings seasons, or transcripts from management presentations on IR sites. They could give you an idea of the current talking points within the firm, then you can zoom in on those specific topics and see how they line up with the quarterly numbers.

For Q3 earnings: Okay, so we don’t know what the key drivers are for every S&P 500 company, but there are a few important themes that matter for certain types of firms.

For Big Tech, you’ll want to check out revenue growth for cloud services, which are at risk of suffering from slimmed-down technology spending. The leading cloud players like Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOGL) have been enjoying supercharged cloud revenue growth for years, and any hint of that slowing could be a warning sign for investors.

When it comes to consumer-facing firms, the focus will be on whether they can raise prices without sacrificing demand. See, companies with strong pricing power – the ability to hike prices without scaring away consumers – are more able to pass rising costs onto their shoppers, meaning they should be well placed to fight their way through the inflation battle. Assessing the stickiness of those price hikes will be at the top of investors’ minds.

Finally, two things matter (yes, we know we said one) for industrial product makers. Just like with consumer companies, industrial firms with strong pricing power are less likely to lose customers to another supplier when they jack up their prices to offset higher costs. Investors will also look for changes in sales forecasts: lower outlooks are to be expected in this weakening economic climate, but whether or not companies meet those revised predictions will dictate how investors react.

3. Beware big stock price reactions.

Poor old Netflix (NFLX) has had a rough year. The firm’s bosses released a weaker 2022 outlook in January, but any fans who quickly rushed to buy more shares at (what they thought was) a bargain price were soon left sour-faced: its stock price took another dive after Netflix’s equally dreary April earnings release.

Netflix share price: Source Koyfin

That story isn’t unique to Netflix, or even to 2022: plenty of stock prices have moved after earnings, pulling in investors looking to buy the dip or sell the rally. But you have to step back and think: a lower stock price isn’t a bargain if the firm's prospects have deteriorated more than the fall implies – and of course, the reverse is true when prices pop higher. So ask yourself whether the company's long-term future has meaningfully changed, as that should influence your decision far more than the shift in its share price.

For Q3 earnings: Investors are on edge, so we’ll probably see the same quick-trigger overreactions to earnings that we’ve seen for the last few quarters. Now, that heightened anxiety can create opportunities to buy high-quality companies that have healthy long-term prospects regardless of short-term dynamics, but you should stay suspicious of particularly massive price moves of, say, 20% or more.