This week the spotlight is on former chairman of the Federal Reserve, Ben Bernanke, who was awarded the Nobel Prize in Economic Sciences and two other U.S. academics for their work on banks and financial crises. This news is refreshing given the hawkish news coming from the current Fed Chairman over the past few weeks. Speaking of banks, this week, investors focus will gradually shift from economic data to earnings data, that is, after this week’s inflation data release. Although a handful of companies have reported third-quarter earnings, this week marks the real kick off as the largest companies begin releasing their earnings, starting with major banks. Four of the largest systemically important banks in the U.S. are reporting this Friday and analysts are watching intently not only to see a hint on the bank’s financial health, but also the health of the economy as whole.
This year has clouded many companies’ bottom-line outlook as the Federal Reserve keeps up its fight against inflation. Earnings announcements should shine a light on companies hit the hardest by inflation, labor costs, supply chain disruptions, and foreign currency exchange rates. There is no doubt that investors are pricing in these issues. As a result, analysts have been downwardly revising their S&P 500 earnings estimates for the third quarter. According to FactSet, analysts lowered their earnings per share estimates during the third quarter by a larger margin on average compared to the last five years.
How close can their estimates be? It could very well be that analysts have become overly pessimistic leading to excessive downward estimates. But given the decline in U.S. Gross Domestic Product (GDP) for the first and second quarters, these revisions are warranted. However, the S&P 500 is expected to report year-over-year earnings growth of 2.4%, though this would be the lowest earnings growth since the third quarter of 2020. So far, most of the companies who have reported earnings have beat the mean estimate. Still, the magnitude of earnings surprises has been relatively lower compared to the last two quarters. The chart below highlights that profit growth has plateaued. While we may not see the profit growth that started in 2020, it has not slowed entirely. We will likely move into a slower growth environment in the coming quarters.
However, FactSet reveals that although analysts have been downwardly revising their earnings estimates, companies have been providing more positive earnings guidance for the third quarter compared to the first half of the year. In the coming days, investors will surely scrutinize companies with earnings losses and weak guidance and reward those who reveal that they are in a better situation than estimated. This earnings season could prove to be an opportunity to make money, as money made in stocks is usually made in down markets.
As a reminder, our next Zoom webinar featuring our Chief Investment Officer Benjamin C. Lau, CFA, and our Investment Team will take place on Wednesday, October 12, 2022 at 1:30pm. We will be discussing the current market volatility, your portfolio strategies and answer any questions that you may have. If you would like to submit a question to our Investment Team to be answered during the webinar click here to submit questions. If you have not registered to attend click here to register and learn more.
Jose Rendon, AIF ®
Senior Portfolio Administrator