US third-quarter earnings season kicks off this week with results from major banks like JPMorgan Chase, Citigroup and Morgan Stanley due this Friday.
With stock markets on a rollercoaster amid Federal Reserve rate hikes, recession fears, elevated inflation, and escalated tensions between Ukraine and Russia, investors will be looking towards Q3 earnings season for clues about the health of the US economy.
Here’s what to watch.
Q3 earnings estimates have fallen in recent weeks. According to IBES data from Refinitiv, analysts expect a 4.1% earnings increase for S&P 500, down from the 11.1% increase forecasted at the beginning of July.
But given lowered earnings estimates, actual Q3 earnings may beat expectations. Stronger-than-expected earnings could still give stocks a boost if accompanied by positive forward-looking guidance from corporate leaders.
The Energy and Industrials sectors are forecasted to report the largest earnings per share (EPS) growth for Q3, supported respectively by higher oil prices and a recovery in the airlines industry amid strong travel demand.
The Financials sector is expected to come under pressure in Q3. For the major US banks reporting this Friday, analysts are expecting weaker Q3 profits on the back of slower investment-banking activity such as IPOs and mergers and acquisitions.
JPMorgan is expected to report a 24% drop in profit while earnings at Citigroup and Morgan Stanley are expected to decline 32% and 28% respectively, according to Refinitiv IBES data.
Company outlook / forward guidance
For the Q3 earnings season, the outlook that companies give about their expectations for the future will be more important than the earnings they report, according to Bank of America equity strategist Savita Subramanian.
Forward guidance will be important given concerns around inflation and a weakening economy.
Investors will be closely monitoring the impact of higher costs and companies’ ability to pass on higher prices to customers to protect profit margins.
Demand conditions and inventory levels will also be keenly watched. Slowing demand and bloated inventories often lead to retailers offering deep discounts to clear stock, which in turn affect profits.
Impact of the stronger dollar
Many US companies with significant international operations could be impacted by the stronger US dollar. The rise of the dollar typically eats into the profits of such companies since they need to convert foreign currencies into US dollars.
Given that roughly 40% of S&P 500 revenues are generated internationally, we could see more companies report a negative impact to earnings due to currency fluctuations.
According to Factset estimates, S&P 500 companies that generate the bulk of their revenues outside the US are expected to record a slight negative earnings growth.
Upcoming inflation data
US producer price index data will be released on Wednesday while US consumer price index (CPI) data will be out Thursday.
The CPI reading will be key. August data showed that inflation remained hot as CPI jumped 8.3% over the past year. Economists forecast September data to show a 8.1% increase year over year.
An elevated CPI reading could reinforce the Fed’s commitment to continue with aggressive interest rate hikes.
Q3 earnings calendar (17 Oct – 28 Oct)
Companies reporting next week include Tesla, Netflix and Snap.
Big Tech earnings from Alphabet, Microsoft, Meta, Amazon and Apple will be reported from 25 – 27 October.