Earnings season has begun and analysts expect to be underwhelmed.»
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 herd 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.
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.
Here are some of the trends to watch as companies report their thirdquarter results in coming weeks:
Technology once again shoul db ea n ar eaof strength. In a world where growth has been in short supply, technology has been an outlier. Customers keep logging on, swiping their screens and hitting the “like” button, which has helped the technology industry regularly report bigger earnings gains than the rest of the market.
Energy companies will hav et he most eye-poppin gg rowth, but that’s because of how weak results were a year ago. Analysts are forecasting earnings to more than double for the energy sector, rising 130 percent. That’s largely because the price of oil is no longer plunging. Crude ended the third quarter at roughly $50 per barrel, slightly higher than it was a year earlier. More importantly, it’s held relatively steady since sinking from $100 in the summer of 2014 to $26 in early 2016.
The rest of the market is more sluggish. Analysts are forecasting drops in earnings for raw-material producers, utilities and companies that sell luxury items and other non-essentials to consumers.
The biggest drops should come from the financial sector, particularly insurers.