Q3 earnings season is officially underway. As usual, the big banks will kick things off, with JPMorgan Chase and Wells Fargo reporting today, followed by Citigroup, Bank of America, Goldman Sachs, and Morgan Stanley early next week. Given their many linkages across the economy, banks provide a timely read on the state of both consumers and other companies, making their quarterly reports a highlight of each reporting season. With estimates for the financial sector as a whole pointing to roughly 0% earnings growth compared to the same quarter a year ago, investors are fully prepared to not be wowed by this quarter’s results. Afterall, it is too soon to see the effect of the Fed’s September rate cut be reflected in wider net interest margins and better credit quality. So, the focus will be primarily on the outlook for the next few quarters as well as on commentary regarding the health of the broad economy.
Looking beyond the financial sector, the S&P 500 index as a whole is expected to see earnings grow by 4.2% compared to the same quarter a year ago. This number has been revised lower by 3.9% since the beginning of the quarter, which is not unusual. Over the past ten years, earnings estimates for any given quarter have been revised lower by an average of 3.3% heading into reporting season. Whether intentional or not, this pattern ends up making estimates easier to beat, resulting in a typical “smile” pattern with earnings estimates initially falling and then rising again.
From a sector perspective, technology is once again expected to lead the charge, though by a narrower margin compared to recent quarters. As was the case last quarter, a key focus for the sector will likely be on whether and how companies are able to monetize their heavy investments into AI, with companies seeing a faster payoff likely to be rewarded. At the opposite end of the spectrum we find the energy sector, for which an expected ~20% decline in earnings is consistent with a similar percentage decline in oil prices during the period. The energy sector is also the one expected to see the largest slowdown in earnings growth compared to last quarter, while the materials sector is expected to take the prize for “most improved” despite still being expected to post a negative earnings growth rate.
Source: FactSet, as of 10/4/2024
Bigger picture, Q3 2024 should mark the fifth consecutive quarter of positive earnings growth for the S&P 500 index, and it is not expected to be the last. Beyond Q3, estimates point to earnings growth accelerating to low-to-mid double digits as soon as Q4, and then staying there throughout 2025. Analysts will be listening closely to companies’ outlooks in search of validation of these estimates, so it will be important to watch if and how these numbers get revised as the season progresses. Should these estimates actually come to fruition, they would provide a powerful backdrop for a stock market that is about to enter the third year of the bull advance that began in the fall of 2022.
Source: FactSet, as of 10/4/2024
The chart below provides a schedule of the reports due over the next three weeks. Busy times ahead.
Source: Wall Street Horizon, as of 10/10/2024. All companies marked with an * were unconfirmed as of October 7, 2024
Sauro Locatelli CFA, FRM®, SCR®
Director of Quantitative Research
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