As the S&P 500’s third quarter earnings season kicks off, investors will gain insight into the health of corporate America.
Fuelled by economic resilience, easing inflation and Federal Reserve rate cuts last month, US equity markets have continued to hit record highs throughout much of the year, according to Nuveen’s chief investment officer, Saira Malik.
However, Malik conceded that whether Q3 earnings results can propel markets higher remains to be seen.
In the September quarter, earnings per share (EPS) expectations for the S&P 500 have declined from +7.7 per cent to +3.8 per cent.
“And while eight of the 11 index sectors are still expected to show EPS growth for the third quarter, estimates for 10 of the sectors have seen declines – ranging from -0.4 per cent for communication services to more than -20 per cent for energy,” Malik said.
“The only sector to have its estimate raised is information technology at +0.5 per cent.”
According to the chief investment officer, the main drivers of downward revisions include falling oil and natural gas prices, sustained inflation and tougher comparisons as strong results from the previous quarter set a higher bar for Q3.
“We’ll also get a peek at the impact lower interest rates may be having on corporate earnings, particularly for the largest US banks and financial institutions, which report quarterly results first. With lower rates expected to crimp net interest margins, we could see EPS growth in the financials sector move even lower,” she said.
Separately this week, new data has shown a significant discrepancy between the earnings outlooks of S&P 500 companies and those made by analysts.
In fact, Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, described the difference as “unusually large”.
“What we usually find is that companies’ guidance is a pretty good proxy for what to expect during the earnings season. Analysts, over the last several quarters, have underestimated earnings, they have also undershot guidance, not by this huge of an amount though,” Adams said in a recent podcast episode from Bloomberg Intelligence.
“For instance, coming into the second quarter earnings season, analysts were expecting about 8 per cent earnings growth, our guidance model was saying 12, and we ended up getting 14. This time around, analysts are expecting nearly 4 per cent earnings growth, and our guidance model is saying 15–16, so it’s a very big gap.”
Delving into why this might be, Adams highlighted the existence of a potential “sector skew”, noting that only about a fifth of S&P companies tend to provide guidance on earnings, with most of these stemming from technology, communications and consumer discretionary sectors.
“Tech and communication, in particular, we know are the strongest segments of the S&P 500, we’ve seen that play out over the last year and a half. The weakest players in the S&P 500 are energy companies, they’re still producing double-digit declines in earnings.
“Analyst consensus thinks they’re going to give us another 20 per cent drop in earnings year-over-year. They don’t give us guidance at all, for the most part, they are just absent from the guidance trends.”
“So we could have a sector skew happening,” Adams said.
