Get ready for an earnings season that will test the skeptics' resolve. It's not about breaking records, but about maintaining credibility in a market that's been on a rollercoaster ride.
The earnings bar has been lowered, but the challenge remains. Analysts predict a softer profit growth for U.S. companies in Q3, a far cry from the spring surge. As the magic of margins fades, the focus shifts to cost management. Big Tech continues to dominate, but other sectors are feeling the pressure of maintaining 'resilient consumer demand'.
The S&P 500's earnings growth is projected to slow down, with an 8.8% year-over-year increase, a notable decline from previous quarters. However, the story beneath these numbers is intriguing. The profit engine is still running, albeit at a slower pace. Investors are eager to find evidence that the upcoming rally has a solid foundation.
But here's where it gets tricky: The macro environment isn't exactly conducive to growth. The Atlanta Fed's GDPNow indicates a decent but rapidly cooling momentum. Inflation hovers around 2.9%, and the 10-year Treasury yield keeps valuations tight. It's a market where even average numbers can trigger alarm bells.
The slowdown is not evenly distributed. Information technology leads the pack with an expected 21% earnings growth, according to FactSet. However, this sector also carries a heavy burden; any misstep could have amplified consequences. On the flip side, energy and consumer staples are predicted to shrink, victims of volatile commodity prices and stubborn costs. This lopsided market dynamic puts pressure on hot stocks to maintain their momentum while defensive stocks struggle to stay afloat.
Energy, in particular, appears vulnerable. Analysts are cutting forecasts as crude oil prices slide and refining margins fluctuate. ExxonMobil's recent warning highlights the delicate balance between oil prices and profits. Consumer staples face a different challenge: input inflation and consumer fatigue. Last year's price increases may now drive shoppers away, making even a solid quarter seem underwhelming.
Now, for a twist: Goldman Sachs identifies 20 'overlooked' stocks that could surprise the market. In a market fixated on a few popular names, these quiet achievers might steal the show. The key takeaway from last quarter is that conviction, not magnitude, drives stock movements.
The true indicator of success won't be found in the numbers alone. It will be revealed in the earnings calls—the tone, the hedges, and the confidence (or lack thereof) regarding pricing strategies and 'strategic discipline'. With Washington's shutdown disrupting data flow, corporate guidance may become a crucial macro indicator. As seen with Delta's recent earnings beat, the market rewards sentiment as much as, if not more than, the numbers.
Valuations intensify the stakes. The S&P 500's forward P/E ratio is significantly higher than its 10-year average, leaving little room for error. Revenue growth estimates are modest, meaning companies must protect margins to maintain their position.
The first wave of reports will come from the banks, with JPMorgan, Goldman Sachs, and Morgan Stanley setting the tone. These reports will test whether the anticipated rebound in dealmaking is materializing. If investment banking shines, it could offset the energy sector's slowdown and consumer fatigue elsewhere in the index.
Johnson & Johnson and BlackRock will also provide early insights into healthcare pricing power and asset-gathering trends. The next two weeks will significantly influence the quarter's narrative and the year's revisions. A narrow earnings base means sentiment can shift rapidly if leaders stumble.
This earnings season is a test of credibility. It's about proving that last year's spending and pricing strategies have staying power. With macro challenges in play, the focus shifts from outperforming to enduring. A missed earnings target might not sink a company, but an incoherent strategy might.
The third quarter is all about credibility. As growth slows and market patience wears thin, a clean quarter, a confident tone, and a touch of realism may be the only surprises left. The winners won't be the most flamboyant, but those who can navigate their slowdown without losing their audience. In a market where optimism is already priced in, credibility might be the final premium asset.
