Many analysts see earnings slowdown as temporary
By Stan Choe
AP Business Writer
NEW YORK (AP) — Earnings reporting season is getting underway, and Wall Street is getting ready to be underwhelmed.
Profit growth likely slowed sharply in the summer for U.S. companies after hurricanes and other natural disasters caused big damage. Analysts are forecasting weaker earnings for several areas of the market from a year ago, a sharp turnaround from earlier this year, when earnings were soaring by more than 10 percent and helping to drive the stock market to record heights.
Thursday marked the unofficial start to earnings reporting season for many investors, when JPMorgan Chase said its third-quarter profit rose 7 percent. For the overall Standard & Poor’s 500 index, analysts are forecasting a rise of 3 percent in earnings per share from a year earlier, down from nearly 11 percent in the spring, according to S&P Global Market Intelligence.
“In other words, earnings results are solid — but not impressive,” said Scott Wren, senior global equity strategist at Wells Fargo Investment Institute.
A slowdown in corporate earnings growth is particularly worrisome to skeptics of the stock market’s relentless rise to record after record this year. Over the long term, stock prices and corporate earnings tend to track each other. But the S&P 500 recently has been climbing faster than profits, which means stocks look more expensive than usual.
Many analysts see the earnings slowdown as temporary, though. A big reason for the pause was likely the devastation created by the summer’s natural disasters. Plus, investor optimism is rising that Washington may herd enough support to cut tax rates, which would mean bigger future profits.
Even without any movement on taxes, the global economy finally seems to be in sync and headed in the right direction. The U.S. economy has been showing stronger signs of growth, as have Europe and developing economies stretching from Latin America to Asia. If the global growth continues, it would give companies something in short supply in recent years: stronger sales. The weaker dollar has also made the value of each euro of sales worth more than a year ago.
That’s why earnings growth for S&P 500 companies is expected to jump back to 11 percent in the last three months of this year, according to CFRA. That’s close to the 15.5 percent and 11 percent growth the index was delivering in the first two quarters of the year.
The diminished expectations for this reporting season also offer a potential benefit for the market: Companies can more easily do better than expected.
“We believe that we’re set up for a nice move in the year-end here,” said Steve Chiavarone, portfolio manager at Federated Investors. “We think earnings will come through and be strong and move markets.”
Here are some of the trends to watch as companies report their third-quarter results in coming weeks:
• Technology once again should be an area of strength.
In a world where growth has been in short supply, technology has been an outlier. Customers keep logging on, swiping their screens and hitting the “like” button, which has helped the technology industry regularly report bigger earnings gains than the rest of the market.
Earnings for tech companies in the S&P 500 likely rose 10 percent in the third quarter from a year earlier, according to an analyst survey by S&P Global Market Intelligence. Of course, tech stocks have also been rising more quickly than the rest of the market this year as a result of their stronger growth.
• Energy companies will have the most eye-popping growth, but that’s because of how weak results were a year ago.
Analysts are forecasting earnings to more than double for the energy sector, rising 130 percent. That’s largely because the price of oil is no longer plunging. Crude ended the third quarter at roughly $50 per barrel, slightly higher than it was a year earlier. More importantly, it’s held relatively steady since sinking from $100 in the summer of 2014 to $26 in early 2016.
Analysts expect Exxon Mobil to report a 33 percent jump in its third-quarter earnings per share, for example. But that’s only after its earnings plunged in last year’s third quarter by 38 percent.
• The rest of the market is more sluggish. Analysts are forecasting drops in earnings for raw-material producers, utilities and companies that sell luxury items and other non-essentials to consumers.
The biggest drops should come from the financial sector, particularly insurers. Damage from the summer’s hurricanes in the Atlantic, as well as from earthquakes in Mexico, will mean big payouts for them. That’s why Wall Street expects XL Group to report a loss of $3.50 per share. Less than two months ago, the forecast was for a profit of 67 cents per share.
For the financial sector overall, analysts are forecasting a nearly 9 percent drop in third-quarter earnings.
Going forward, though, analysts are more optimistic. Interest rates should climb as the Federal Reserve continues to raise short-term rates and pulls the plug on its bond-buying stimulus program. That would let insurers earn more interest on their bond investments and would help banks make bigger profits from lending.
