USA TODAY US Edition
NOWHERE TO GO BUT UP
With Q3 expectations low, investors can look ahead to higher profits in the future
Crummy corporate earnings don’t have to add up to a really lousy stock market.
Sure, Wall Street analysts are forecasting profit growth to contract in the third quarter for the first time since 2009. But how the stock market reacts to corporate earnings reports is more about the level of expectations heading into the earnings-reporting season — and what the outlook is for next year.
And right now, expectations for third-quarter earnings are very low and the profit outlook for 2016 isn’t nearly as dreary.
In Wall Street-speak, that means companies have a better chance of topping a very low earnings bar. It also means investors could look beyond the current quarter to future quarters.
Some stock market strategists argue that the current quarter will mark the low point for profits. Others see key headwinds, such as a collapse in energy prices, starting to abate, paving the way for better profits.
The forecast for third-quarter profit growth for the S&P 500 is -3.9%, which is well below the 7.4% earnings growth analysts were forecasting on Jan. 1, according to Thomson Reuters. The point: Analysts have slashed estimates so much that it’s more likely companies will top the lower forecasts.
So far that has been the case, with 71% of the 78 S&P 500 companies that have reported earnings beating expectations, better than the longer-term “beat” average of 63%.
Despite the lousy earnings projections, the Dow Jones industrial average has finished higher three consecutive weeks and has gained more than 900 points, or nearly 6%.
Gina Martin Adams, a stock strategist at Wells Fargo Securities, thinks weak third-quarter earnings will mark the trough, due in large part to stabilization in the oil patch.
“Commodity prices were responsible for more than twothirds of the earnings-per-share slowdown over the last 12 months,” Adams says. “As long as commodity prices are in the process of bottoming, they will (have a) more limited drag on earnings going forward.”