More than 70% of S&P 500 companies have reported earnings for July through September. And the results? Well, they look better than Wall Street had anticipated.
The latest: 76% of S&P 500 companies have beat earnings-per-share forecasts, while 61% have beat predictions on revenue, according to FactSet. That’s good news for stocks, which generally move in relation to expectations during earnings season.
Third-quarter earnings are still poised to decline 2.7%, the largest year-over-year drop since the middle of 2016, per FactSet. But that’s much better than the 4.1% drop that had been penciled in one month ago.
“Earnings in the US are surprising strongly on the upside,” Mislav Matejka, head of global and European equity strategy at JPMorgan, wrote in a note to clients on Friday.
Investors also appear to be more forgiving. “Despite some notable profit warnings, stocks that are missing estimates are not being penalized as severely as in the past quarters,” Matejka said.
The reason for the pickup is twofold, Nick Raich, CEO of The Earnings Scout, told me.
Typically, 75% to 80% of S&P 500 companies beat expectations in any given quarter, since companies favor conservative estimates and analysts follow suit, he said.
This quarter, corporate earnings are also benefiting from Federal Reserve stimulus. A third consecutive interest rate cut, made official last week, also didn’t hurt.
Trouble ahead: Meanwhile, the outlook for the fourth quarter is dimming. Year-over-year earnings — which one month ago were expected to grow by 2.4% — are now forecast to dip by 0.4%, according to FactSet.
Investors are already thinking about the 2020 election
If you thought it was too early for investors to worry about the US presidential election — think again.
Portfolio managers are “intently focused on the investment implications of potential outcomes of the 2020 US elections,” Goldman Sachs said in new research published Friday. From tax implications to sectors that could face heightened regulation, there’s plenty to chew over. Significant attention is being paid to the policy proposals of Senator Elizabeth Warren, according to the investment bank.
Goldman’s take: One element that can be quantified is the impact of corporate tax rates on S&P 500 earnings. If the 2017 Republican tax cuts are completely reversed, for example, Goldman estimates that corporate earnings growth in 2021 would dive 7% instead of rising 5%.
Sector pressure: It’s also fair to assume that some sectors could come under pressure from heightened policy uncertainty, Goldman said. The bank puts health care stocks in that category, as well as Facebook and Google.
For investors, it will be important to assess whether campaign promises are likely to become reality, Goldman said. The strategists noted that certain “Trump trades” made in 2016, such as investing in stocks that would benefit from infrastructure investment, later reversed their gains.
“History suggests that US equities actually react more to policy implementation than election outcomes,” said chief US equity strategist David Kostin.
