The earnings season for U.S. stocks kicks off on October 8 with PepsiCo, followed by JPMorgan Chase and Wells Fargo on October 11. According to data from FactSet, analysts expect that the S&P 500 companies will see an earnings per share increase of 4.1% year-over-year, reaching just over $60. This projection assumes a sales growth of 4.7%, factoring in the slowing economic growth and inflation rates down to single digits.
While product costs haven’t seen significant increases, other expenses, such as employee salaries, continue to rise, curbing the potential for businesses to enhance profit margins.
The growth of the index is being held back by “cyclical” sectors that are sensitive to economic conditions. These industries have matured, causing their sales to fluctuate with the economic outlook.
Evercore predicts that earnings for the financial, consumer discretionary, and industrial sectors will see a slight decline compared to the previous year. Similarly, the materials and energy sectors are expected to underperform, particularly energy, due to lower oil prices compared to the third quarter of last year.
On the bright side, there is a likelihood that earnings will exceed expectations. This has been the trend; historically, from the financial crisis to the pandemic, corporate earnings often surpass forecasts by a few percentage points.
For instance, in the second quarter of 2021, S&P earnings exceeded expectations by over 20% as the economy rebounded rapidly from the struggles of 2020. Subsequently, Wall Street adjusted to the direction of the economy and corporate profits, leading companies to consistently achieve modest beats on their forecasts. However, such performance may not necessarily lead to significant stock market gains.
So far this year, the S&P has risen about 20%, reflecting ongoing economic growth, the Federal Reserve’s interest rate cuts to sustain expansion, and continuous increases in corporate profits.
It’s important to note that this year’s rally hasn’t only been driven by large tech stocks; every sector within the S&P has seen gains. This upswing has pushed the expected price-to-earnings ratio for the index to around 21 times, reaching a high not seen since before the Fed started raising rates in late 2021.
If analysts find reasons to lower earnings expectations, such as concerns about demand, the S&P—currently slightly above 5,700—would appear to be trading at a 22 times earnings multiple. This scenario could put the market under selling pressure, pushing it back to more reasonable levels.
Even if corporate profits do exceed expectations, analysts’ adjustments to their earnings forecasts are unlikely to have a major impact on the stock market. Should companies adopt a positive tone in their earnings reports or raise their guidance, earnings expectations might increase by a few percentage points, yet stocks would still look somewhat expensive.
