The third quarter earnings season has just started in the United States. With the exception of the US elections in November, this review of corporate activity appears to be the key to determining how Wall Street ends the year. To date, The S&P 500 is having an exceptional year, with an increase of 22.7% since the first day of the year, representing the best start since 1997, and if the year ended now, it would be the sixth best for the index in the last twenty years. As the S&P reaches all-time highs, investors seem to be anticipating results better than those expected by analyst consensus, as already happened in the first quarter. Actually, Companies in the index estimate earnings growth almost four times faster than analysts forecast.
Many investors may be wondering whether the gains the U.S. stock market is seeing this year are justified, especially at a time when analysts expect a drag on earnings growth. Wall Street started earnings season at all-time highs and is celebrating the best first nine months of the year since 1997. The S&P 500 is hovering around 5,840 points with an annual rise of nearly 23%, and these results will determine how the world’s largest index by capitalization faces the last three months of the year.
It’s been a positive start to the season, with JP Morgan, Wells Fargo and Blackrock kicking off last Friday with three better-than-expected results. It is now necessary to check whether the expectations of analysts are met, who predict a decline in the profit growth rate to 4.3%, according to the data collected. Bloombergor if the results are more in line with the picture that the companies themselves put forward, of a growth rate of 16%. But that’s not the only factor to consider.
The divergence between companies and analysts
The difference between the earnings expected by analyst consensus and those of the index companies themselves is now “surprisingly large.”in the eyes of Gina Martin Adams, chief equity strategist at Bloomberg Intelligence. If companies’ forecasts are more in line with reality than those of analysts, this would explain the optimism that investors seem to be feeling at the start of the filing season.
The S&P 500 has in its favor the fact that this would not be the first time this year that corporate profits have surprised analysts’ expectations upwards. In the first quarter, a profit increase of 3.8% on average was expected, but it ended up being twice as large, at 7.9%.
On the other hand, analysts favor the weakness shown by growth in Europe in recent weeks. At its September meeting, the European Central Bank reduced its economic growth forecasts for this year and the next two. All indications are that Germany will experience its second consecutive year of economic contraction and several warnings, in the form of profit warnings, have been issued by major European listed companies such as H&M and Volkswagen.
A paradise for active management
Markets do not appear to fear this earnings season considering the levels at which the US stock market is trading, and there are other indicators in the futures markets that suggest that in the context of this earnings season , they are going to produce more strong movements in the prices of individual securities, relative to what the index does.
This is reported by the Bank of America analyst team led by Oshung Kwon. Experts point out that futures contracts now take into account that there will be strong movements in individual stocks, while incorporating little volatility for the index as a whole. If true, this would be a favorable context for stock selection and active management, since There will be a handful of stocks that will perform exceptionally well compared to the selective stock.
The impact of the elections
The results season is on this occasion the prelude to this year’s major electoral event for the markets: the presidential elections in the United States. The nerves of the markets, particularly in the United States, will be put to the test in the coming weeks in the face of new developments that could arise. As early as the second quarter earnings season three months ago, corporate election credentials skyrocketed: Bloomberg shows how 110 of them mentioned them during their press conferences, which is 62% more than in the elections four years ago, according to data collected by Bank of America.
The direction that US economic policy takes over the next four years will be decisive for the stock market, at a time when new trade policy measures are being considered and fiscal policy is also gaining weight as one of the most important factors for the economy. the years to come.
