Trends to watch as earnings season looms on Wall Street
Energy, tech sectors should drive gains as profit growth slows
Big U.S. banks will be among the first companies to report how much money they made in the third quarter, kicking off a weather-impacted earnings season this week in which profit growth is expected to slow.
Profits at companies in the Standard & Poor’s 500 stock index are expected to increase by 4.6% in the July-thru-September quarter, once corporations have finished reporting results, according to earnings-tracker Thomson Reuters. That’s a sharp deceleration from the 10%-plus gains in the first two quarters of 2017, which marked the best profit gains in six years.
“It’s difficult to keep up the same pace,” says Omar Aguilar, chief investment officer, equities, at Charles Schwab.
Most of the third-quarter earnings gains will be driven by the energy industry, whose profits grew an estimated 139%. A 10.5% rise in the price of U.S. oil was a big factor.
Technology companies are also expected to fuel the quarterly earnings gains, with projected growth of 12.2%.
Here are big trends to watch as companies report their bottom lines in coming weeks:
HURRICANE IMPACT
The destruction caused by Hurricanes Harvey and Irma could hurt insurance companies, which may have to absorb $100 billion in insured losses, according to LPL Financial. Retailers and energy companies had business disrupted, which is expected to weigh on results.
Big losses paid out by property and auto insurers are factors behind an expected 7.7% contraction in profit growth for the financial industry.
“The hurricanes,” Aguilar says, “will be reflected in the earnings reports for sure.”
Still, investors are likely to look beyond the transitory impact of the hurricane season, he says. Analysts expect overall S&P 500 profit growth to speed up to
12.3% in the final quarter of the year and project earnings to grow
10% or more in the first three quarters of 2018.
Citigroup and J.P. Morgan Chase on Thursday launch the parade of financial earnings, followed by results Friday from Bank of America and Wells Fargo, which is still trying to rebound from its unauthorized accounts scandal.
Investors will be watching to see if banks have to write off bad loans. That’s a risk after cyberthieves stole personal data from roughly 143 million Americans in the hack of credit-reporting company Equifax.
Wall Street will also be looking to see how healthy the banks’ “lending pipelines” are. Those pipelines are a way to measure the strength of the consumerdriven economy, Keefe, Bruyette & Woods bank analyst Brian Gardner said in a podcast.
HELP FROM ABROAD
Better earnings results are expected from U.S. companies that do a lot of business abroad.
The reason? Rebounding economies in places such as Europe, Japan and emerging markets likely generated more business abroad for U.S. multinationals. In addition, the dollar fell about 3% versus a basket of foreign currencies in the quarter, which makes U.S. goods cheaper when bought with stronger foreign currencies.
“Companies that sell most abroad have a double tailwind,” says Brad McMillan, chief investment officer at Commonwealth Financial Network, noting that those with 50% of sales abroad are expected to grow earnings by almost 8%. That’s well above the flat results expected for companies with more than 50% of sales in the U.S., he said.
TOUGHER COMPARISONS
Also crimping profit growth is tougher year-over-year comparisons. Last year’s third quarter marked the end of the so-called “earnings recession,” as it broke a string of four consecutive quarters of negative profit growth.
“Last year’s third quarter was the first quarter in awhile where we started to see things start to improve,” says Craig Sterling, head of U.S. equity research at Amundi Pioneer Asset Management.
SIZZLING SALES?
Wall Street is expecting sales and revenues to top expectations. Of the 23 firms in the S&P 500 that have reported results, 78% have topped analysts’ sales expectations, well above the long-term average of 59%.
“That’s one positive people might be missing,” Sterling says.
Earnings, of course, are important to stock investors, as profits are closely tied to the valuation of the market.
Currently, the S&P 500 is trading at 18 times estimated earnings for the next four quarters, according to Thomson Reuters data, which is above the longterm average of around 15.
CEOs are expected to paint an upbeat outlook for their businesses amid strengthening economies around the globe.
“I think CEOs will be more positive on the outlook,” Aguilar says. “No one can see any downside of tax cuts, as it is a positive for most businesses. They are also seeing a pickup in global growth.”