Analysts slashed third-quarter earnings estimates by so much before the season kicked off that even a half-decent report looks like a home run.
When the growth ceiling is at 3% to 4%, it’s not hard to pull off a “beat.” The game’s rigged, and everyone’s playing along.
Keep in mind, second-quarter earnings growth was more than 11%. So, strip away the hype and things look way less rosy.
Report card
- As of last Friday, 14% of the companies in the S&P 500 had reported their third-quarter results, with 79% of them beating estimates, according to FactSet.
- On aggregate, these companies beat forecasts by 6.1%.
Sounds great, right? Well, not so fast. Even for these so-called beats, earnings growth is crawling at just 3.4%. If that sticks for this quarter, it will be the lowest in more than a year.
Will earnings growth go up from here? Probably. But let’s be real – these beats are a product of lowball estimates to begin with. It’s like getting a trophy for showing up.
Leading up to the season, analysts had been slashing estimates like they were pruning dead branches. At some point, growth forecasts went from nearly 8% to a paltry 3.2%. Get the picture? The bar is set so low.
If earnings season sticks to the script, we are looking at yearly earnings growth above 7% for the third quarter, especially with most of the heavy hitters, like Big Tech, still on deck. Tesla reported earnings earlier and saw its stock jump 12% in late trading hours.
But is that enough to dive in and start scooping up some stocks? Maybe not. Even 7% growth would be a serious slowdown from previous quarters, and with US elections around the corner, expect volatility to keep the markets on edge.
Here’s what UBS strategists suggest: don’t make knee-jerk changes to your portfolio and maybe keep gold – it’s always good to have a shiny hedge.
