What strong third-quarter earnings say about the US economy: Bank of America

What strong third-quarter earnings say about the US economy: Bank of America

  • The S&P 500 appears to be on track to have its strongest earnings season since the third quarter of 2021.
  • 82% of S&P 500 companies that have reported earnings so far have beat expectations, according to FactSet.
  • Bank of America says earnings tell markets four things about the state of the economy.

Corporate earnings look good this quarter – and that says a few things about the future of the US economy.

Bank of America noted in a note on Monday a resilient earnings season so far, despite earlier concerns on Wall Street about a continuing slowdown in corporate earnings.

Of the 81% of S&P 500 companies that reported third-quarter results, 82% reported earnings above analyst estimates, according to FactSet data, putting this earnings season on track to be the strongest since 2021.

It represents good news for stocks, and could tell investors four key things about the U.S. economy, according to strategists at Bank of America.

1. The United States can still avoid a recession

The economy may be on its way to a soft landing, and companies have already gone through the worst of the slowdown in earnings growth. .

“The economy is slowing, but companies have suffered stagnant profits, cut costs, and are now enjoying margin expansion,” the strategists said.

There are still concerns that slowing consumer demand will drag down profits, with real sales currently contracting at a 2% annual pace. But profit growth accelerated to 4% year-on-year this quarter, the bank said, a sign that earnings have bottomed and are about to rise.

Moreover, history shows that profits tend to recover faster than they fall, strategists said, and recessions typically remove excess capacity, leading to a leaner cost structure and improved margins.

2. The economy could see a productivity boom

Non-farm labor productivity accelerated by 4.7% on a quarterly basis. Meanwhile, revenue per worker in the S&P 500 is near its highest levels since 2008, despite slowing sales.

“The upgrade cycle and domestic investments amid the restoration of subsidies indicate a potential productivity boom in the future,” the bank said.

The bank notes that references to “reinstatement of support” in earnings calls have risen significantly, implying increased domestic capital spending by companies.

3. Earnings expectations are better than they look for the fourth quarter

Analysts at Bank of America said fourth-quarter profit expectations were down 3.5% since the start of October, but half of that was coming entirely from Pfizer and Merck, two drug companies that face “special risks.”

In the rest of the market, 2024 EPS expectations maintain the historical average. Analysts expect a decline of just 0.6%, compared to the usual 1.2% decline in profits.

4. There are still concerns about the state of the American consumer

Concerns remain about US consumer weakness as spending slows amid dwindling pandemic-era savings, with the potential to hurt corporate profitability.

Companies that beat earnings expectations outperformed the S&P 500 by 126 basis points the day after reporting their financials, below the average of 147 basis points.

Meanwhile, companies in the consumer discretionary and staples sectors were punished when their earnings beat Wall Street’s expectations: On average, underperforming consumer discretionary companies underperformed the S&P 500 by an average of 129 basis points, in When the performance of basic commodities was lower than the performance of the index. By 85 basis points.

The penalty was more severe when companies failed to fully meet earnings expectations, with consumer discretionary underperforming the S&P 500 by 351 basis points, while commodities underperformed the S&P 500 by 242 basis points.

However, investors are still waiting for the rest of the S&P 500 companies to report their financials over the next few weeks. This includes 22% from the consumer discretionary sector, 30% from the technology sector, 37% from small-cap stocks, and 29% from mid-cap stocks, which can give more information about the overall macro environment, Bank of America strategists said. .

You may also like...

Leave a Reply

Your email address will not be published. Required fields are marked *