Brace for slowdown in growth as holiday season nears
NEW YORK — Earnings reporting season is getting underway, and Wall Street is getting ready to be underwhelmed.
Profit growth likely slowed sharply in the summer for U.S. companies after hurricanes and other natural disasters caused big damage. Analysts are forecasting weaker earnings for several areas of the market from a year ago, a sharp turnaround from earlier this year, when earnings were soaring by more than 10 percent and helping to drive the stock market to record heights.
Thursday marked the unofficial start to earnings reporting season for many investors, when JPMorgan Chase said its third-quarter profit rose 7 percent. For the overall Standard & Poor’s 500 index, analysts are forecasting a rise of 3 percent in earnings per share from a year earlier, down from nearly 11 percent in the spring, according to S&P Global Market Intelligence.
“In other words, earnings results are solid — but not impressive,” said Scott Wren, senior global equity strategist at Wells Fargo Investment Institute.
A slowdown in corporate earnings growth is particularly worrisome to skeptics of the stock market’s relentless rise to record after record this year. Over the long term, stock prices and corporate earnings tend to track each other. But the S&P 500 recently has been climbing faster than profits, which means stocks look more expensive than usual.
Many analysts see the earnings slowdown as temporary, though. A big reason for the pause was likely the devastation created by the summer’s natural disasters. Plus, investor optimism is rising that Washington may put together enough support to cut tax rates, which would mean bigger future profits.
Even without any movement on taxes, the global economy finally seems to be in sync and headed in the right direction. The U.S. economy has been showing stronger signs of growth, as have Europe and developing economies stretching from Latin America to Asia. If the global growth continues, it would give companies something in short supply in recent years: stronger sales. The weaker dollar has also made the value of each euro of sales worth more than a year ago.
That’s why earnings growth for S&P 500 companies is expected to jump back to 11 percent in the last three months of this year, according to CFRA. That’s close to the 15.5 percent and 11 percent growth the index was delivering in the first two quarters of the year.
The diminished expectations for this reporting season also offer a potential benefit for the market: Companies can more easily do better than expected.
“We believe that we’re set up for a nice move in the year-end here,” said Steve Chiavarone, portfolio manager at Federated Investors. “We think earnings will come through and be strong and move markets.”