(Bloomberg) — There’s an unusual divergence in Corporate America’s earnings outlook this season: While analysts have cut forecasts, companies’ forecasts point to another strong quarter.
Data compiled by Bloomberg Intelligence shows that analysts expect S&P 500 companies to report a 4.2% increase in third-quarter earnings compared to a year earlier, down from a 7% forecast in mid-July. The orientation of companies, on the other hand, implies a jump of around 16%.
Gina Martin Adams, chief equity strategist at BI, said the dichotomy was “unusually large” and that the significantly stronger outlook suggests “companies should easily beat expectations.”
“Margins should continue to rise as companies emphasize efficiency amid economic uncertainty,” he wrote in a note. Earnings per share guidance momentum has also turned positive, with a BI model showing a score of 0.14 for the three months to September, compared to a post-Covid average of 0.03.
Meanwhile, a Citigroup Inc. earnings revisions index showed strong negative momentum in September, falling to its lowest level since December 2022. Despite analyst fears, the S&P 500 hit another all-time high on Friday and it has risen 22% in 2024, its best level. beginning of a year since 1997.
This is an indication that investors are not deterred by the reduced forecasts and are instead betting that this earnings season will once again offer positive surprises, just as was the case in the first quarter, when expectations were for earnings growth. 3.8% and it turned out to be 7.9%.
The reporting period began on a positive note. JPMorgan Chase & Co. cleared the lower bar after posting a surprise gain in net interest income for the third quarter and raising its forecast for the key source of revenue. The stock rose about 4.5% after Friday’s earnings, while Wells Fargo & Co. rose 5.6%, showing that the impact of falling interest rates was not as bad as was feared.
“Several large-cap bank stocks had de-risked in mid-September ahead of earnings season,” Morgan Stanley strategists led by Michael Wilson wrote in a note Monday. “This encouraged a reduction in expectations in the quarter. “Early results from earnings season indicate that banks are surpassing that bar.”
There have certainly been some warning signs. Earlier this month, Nike Inc. took steps to reset Wall Street’s expectations ahead of the arrival of new CEO Elliott Hill, withdrawing its full-year sales guidance. And in late September, FedEx Corp. slumped after warning that its business would slow over the next year.
“The main focus is the outlook for companies on the other side of the curve now that an easing cycle has begun,” Bank of America Corp. strategists Ohsung Kwon and Savita Subramanian wrote in a note last week, cutting their forecasts. of S&P 500 EPS by 2024. to $243 from $250. “The bar is not high. As long as companies have overcome macroeconomic headwinds and see early signs of improvement from lower rates, stocks should be rewarded.”
Investors’ attention will eventually turn to the group of Magnificent Seven stocks that largely fueled this year’s rally, including Apple Inc. and Nvidia Corp. Consensus expects their earnings to rise about 18% from a year ago. , a slowdown in the pace of growth. to 36%, seen in the second quarter. The group has underperformed since the second-quarter reporting season and has more recently been trading sideways as the S&P 500 rally broadened.
“The fundamental reason for Mag 7’s underperformance could simply be a slowdown in earnings-per-share growth from last year’s strong pace,” Morgan Stanley’s Wilson said. “If earnings revisions show relative strength for Mag 7, these stocks are likely to outperform again and market leadership may shrink, as was the case during the second quarter and all of 2023.”
–With the help of Farah Elbarawy.
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