Third-Quarter Earnings Reports: As we enter the third quarter of 2024, a mix of optimism and apprehension fills the air. Investors and analysts alike are preparing for the impending wave of earnings reports, but there are mounting concerns about a potential slowdown in economic growth. This summer, a chorus of warnings came from various sectors, particularly restaurants and retailers (excluding major players like Walmart), indicating that consumers are feeling the strain of the current economic climate.
Concerns have also surfaced regarding the artificial intelligence (AI) ambitions of Big Tech companies. These giants significantly influence stock market performance, and uncertainty surrounding their growth prospects has raised doubts. Coupled with signs of a cooling job market, the Federal Reserve’s decision to cut interest rates to stimulate the economy has raised questions about the necessity of such measures in an economy that seems to need prodding in the first place.
The Upcoming Earnings Reports: What to Watch For
This week, major companies, including JPMorgan Chase & Co. and Delta Air Lines Inc., will kick off their third-quarter earnings reports. These results will be critical in assessing how much further economic stimulation is needed and whether recent fears about a looming recession are justified. According to Mark Malek, chief investment officer at Siebert Financial Services, the dynamics of the market have been driven by concerns surrounding the Federal Reserve’s interest rate policies and the potential for an economic downturn. “The fear of the economy falling into a recession goes hand in hand with the Fed’s actions,” he noted.
Many of the concerns that influenced previous earnings reports remain prevalent today. Analysts have highlighted a “bifurcation” in consumer spending patterns—higher-income individuals appear to be less affected by the economic pressures of the last two years, while lower-income consumers have felt the impact more acutely. In addition, geopolitical tensions, including the escalating war in the Middle East and ongoing conflicts in Ukraine, further cloud the economic outlook. Meanwhile, China’s monetary stimulus plans, aimed at stabilizing its struggling economy, remain an unknown factor for global markets.
The Impact of Interest Rates and Inflation
Analysts suggest it could take time for the benefits of recent interest rate cuts to manifest in the everyday lives of consumers. There is ongoing debate about whether the Fed needs to lower borrowing costs further and how this could influence investor behavior. After significant investments in large tech firms such as Nvidia Corp. and Microsoft Corp., it’s uncertain whether investors will seek returns in other sectors.
Despite the concerns, markets reacted positively to the U.S. September jobs report, and a potential strike by East Coast dockworkers was averted with a tentative agreement, alleviating some fears of disruption in the economy.
Earnings Expectations and Market Dynamics
According to a recent FactSet report, Wall Street analysts expect earnings per share (EPS) growth of 4.2% for S&P 500 companies in the third quarter. While this would mark the fifth consecutive quarter of year-over-year EPS growth, it represents a deceleration from previous quarters. The report also revealed that analysts have revised down their EPS projections more than usual, indicating lowered expectations. However, such reduced expectations can create a more favorable environment for companies to exceed them.
Although inflation is easing, consumers are still feeling the pinch from elevated grocery prices and job-related cost reductions. Nevertheless, corporate profit margins are expected to remain relatively stable, with S&P 500 net profit margins projected at 12.1% for the third quarter. This margin forecast is slightly lower than the previous quarter but still above the five-year average of 11.5%. John Belton, managing director at Gabelli Funds, remarked on the discipline shown by companies over the past few years in controlling costs and managing expenses, suggesting that this trend is likely to continue.
In the real estate sector, lower interest rates are expected to have a clearer impact, although some analysts caution that mortgage rates may not drop immediately, potentially pushing home prices higher as buyers take advantage of lower borrowing costs.
Key Earnings Reports to Watch
As the earnings season unfolds, all eyes will be on JPMorgan and other major banks, which will provide insights into lending trends and consumer spending that drive the economy. Analysts will be keen to understand the outlook for loans, IPOs, and overall deal-making as interest rates decline. Following the banks, the so-called “Magnificent Seven”—including tech giants like Meta Platforms Inc., Alphabet Inc., Nvidia Corp., Apple Inc., Microsoft Corp., Amazon.com Inc., and Tesla Inc.—will report their earnings. These reports will be critical as these companies invest heavily in AI, prompting questions about the costs, their ability to meet high expectations, and the timing of any potential returns on investment.
In a recent statement, Sundar Pichai, CEO of Alphabet, noted that the risk of underinvesting in AI far outweighs the risk of overinvesting, given the technology’s transformative potential. However, a report from Goldman Sachs advised caution, highlighting that investors often focus too heavily on technology originators while overlooking opportunities for newer companies that can capitalize on existing investments to create new products and services.
Brad Peterson, national portfolio advisor at Northern Trust, emphasized that while growth prospects remain for the Magnificent Seven, other companies will also begin to capture investor interest. “We think there’s still a lot of growth for these companies, but other companies are also going to be growing as well,” he explained.
Conclusion: What Lies Ahead?
As we prepare for this earnings season, the market is poised at a crossroads. With concerns over economic growth and corporate performance looming large, the earnings reports from major companies will play a crucial role in shaping the narrative for investors. The interplay of interest rates, inflation, and geopolitical tensions will continue to influence market dynamics, making it essential for investors to stay informed and agile in their strategies. As the earnings reports roll in, we will gain further clarity on the state of the economy and the resilience of various sectors amid ongoing challenges.
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