- The S&P 500 is poised for its strongest earnings season since Q3 2021.
- According to FactSet, 82% of S&P 500 companies that have reported so far have exceeded expectations.
- Bank of America indicates that earnings reveal four things about the state of the economy to the market.
This quarter, corporate earnings are looking absolutely satisfactory – and that’s indicating several aspects of the future of the US economy.Thank you for reading this post, don't forget to subscribe!
Despite earlier concerns about a sustained slowdown in corporate profits on Wall Street, Bank of America noted a resilient earnings season thus far in a Monday note.
FactSet data reveals that out of the 81% of S&P 500 companies that have reported Q3 results, 82% recorded earnings that surpassed analysts’ predictions, making this expected to be the strongest earnings season since 2021.
Bank of America strategists state that this is good news for stocks and it can communicate four important things about the US economy to investors.
1. America can still avert recession
The economy may be on a decelerating trajectory, and companies have already traversed the worst phase of the earnings growth slowdown.
“The economy is cooling down, but companies have experienced a deceleration in earnings, they have curtailed costs, and currently, they are reaping the benefits of margin expansion,” stated the strategists.
There are still concerns that lackluster consumer demand may impede earnings, with real sales currently declining at a yearly rate of 2%. However, earnings growth in this quarter reached 4% YoY, signifying that profits have reached a nadir and are on the cusp of recovery, as per the bank’s analysis.
Furthermore, historical evidence indicates that earnings rebound more quickly than they decline, and recessions typically eliminate surplus capacity, which leads to a lower cost structure and enhanced margin profiles.
2. The economy might witness a surge in productivity
Non-agricultural labor productivity observed a 4.7% QoQ increment. Meanwhile, despite slowing sales, revenue per employee in the S&P 500 is reaching its highest level since 2008.
“Domestic investment seems to indicate an imminent boom in productivity during the upgrade cycle and re-shoring,” mentioned the bank.
The bank’s notes cited in the earnings call demonstrate a striking increase in “re-shoring,” indicating heightened domestic capital expenditure by companies.
3. Earnings expectations for Q4 are more positive than anticipated
Bank of America analysts remarked that earnings expectations for Q4 dropped 3.5% since early October, but half of that decline was entirely attributed to Pfizer and Merck, two pharmaceutical companies facing “extraordinary risks.”
In the rest of the market, earnings per share expectations in 2024 remain close to the historical average. Analysts anticipate only a 0.6% earnings decline, as opposed to the usual 1.2% decline.
4. Concerns still persist regarding the state of American consumers
There are still apprehensions about weakened US consumers as spending slows down amid a decrease in savings due to the pandemic; this is likely to impact corporate profitability.
Companies that exceeded earnings expectations outperformed the S&P 500 by 126 basis points on the day after reporting their financial results, compared to an average of 147 basis points.
Meanwhile, companies in the consumer discretionary and staples sectors faced penalties when they earned lower-than-expected earnings: On average, underperforming companies in the consumer discretionary sector lagged the S&P 500 by an average of 129 basis points, while staples underperformed the index by 85 basis points.
The punishments were even more severe when companies completely missed earnings expectations, with consumer discretionary stocks underperforming the S&P 500 by 351 basis points, while staples underperformed by 242 basis points.
However, investors are still awaiting financial reports from the remaining S&P 500 firms in the coming weeks. This includes 22% of the consumer discretionary sector, 30% of the technology sector, 37% of small-cap stocks, and 29% of mid-cap stocks, which may offer more insights into the overall macro environment, according to Bank of America strategists.