Q3 earnings season is about to rev up with the big US banks reporting on Friday and major Tech companies later this month. Over the past three quarters, S&P 500 earnings have contracted on a YOY basis, and current expectations for the overall index are for another marginal decline of about -0.5%. Based on forward analyst projections, this would mark the final quarter of decline before returning to more normal growth rates of 8-10% over the next few quarters. However, there’s evidence to suggest that earnings may be able to return to positive growth ahead of schedule.
For starters, in what has become a big theme in 2023, the economy looks like it outperformed again in Q3 – the latest reading of the Atlanta Fed’s GDPNow estimate is at a lofty 5.1% growth rate (well above consensus of around 3%), which should translate to better earnings if the economy was indeed that strong last quarter. In addition, inflation has continued to moderate which implies a possible improvement in corporate profit margins that have been under pressure from higher costs. Not to mention that analysts usually do a good job of “lowering the bar” heading into earnings season, which means that there are usually plenty of positive surprises as earnings come in. Over time, the “beat rate” shows that about 60% of companies surpass expectations on average each quarter. The last two quarters have been well above that at an 80%+ rate which suggests that analysts have become overly cautious recently.
If earnings manage to surprise to the upside and return to positive growth, it may contribute to a stock market rebound here in Q4. After the correction over the summer stocks now appear to be oversold, with investors turning rather gloomy again reflected in measures of sentiment that have returned to pessimism. As we move into what’s typically a more favorable seasonal period for returns, conditions seem ripe for a rally and better news on the earnings front would likely help to provide a lift. As always, there will be plenty to find out from corporate America over the next few weeks.
Source: Bloomberg, as of 10/11/23
Carl Noble, CFA®
Senior Vice President of Investments
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