A look ahead to US earnings season

The coming earnings season will provide the bridge between the September and December Fed meetings, and as a result will be a key catalyst for markets into the traditionally strong fourth quarter of the calendar year. 

Wall Street street sign
Source: Bloomberg

Current expectations suggest the US reporting season will see a decline of 3% in Q3 earnings compared to a year ago, versus a rise of 1.6% in revenues. In Q2, earnings fell by 2.7% and revenues were down 0.2%. The Q2 figure was an improvement over expectations, which had forecast a 5.9% fall in earnings and a drop of 0.7% in revenues. Q3 is likely to have benefited from higher commodity prices and a reduction in dollar strength, both of which plagued the Q1 and Q2 earnings seasons.

Overall growth in earnings has been negative, with Q2 the fifth consecutive period when earnings declined. Energy, of course, was a major influence on this, but overall the last year or so has not been one of the best periods for US earnings. However, now we may be entering a better period, as growth picks up in Q4 and heads higher in the first part of 2017.

Crucially, while profits continue to be weak, it may be the ‘profits recession’ in the US has bottomed, and further improvement should provide a strong tailwind for stocks. Analyst estimates are also still on the cautious side. Recent surveys by Thomson Reuters suggest an overall forecast for a 0.8% decline in earnings; usually analysts cut expectations into the quarter anyway. Since the average earnings surprise since Q2 2009 has been 4.8%, there is plenty of room for a bounce in earnings, helping to crystallise bullish sentiment. Q2 2016 saw an earnings surprise of 3.6%, so it might not take much for a standout earnings season to develop, especially since the fundamental picture has improved markedly over the past 12 months.

It is important to remember that earnings season usually leads to some hefty increases in volatility, especially in those stocks that noticeably beat or miss expectations. Buying a stock going to earnings can provide some interesting opportunities, but it will usually lead to wilder swings in the price, which means investors should be carefully prepared where position sizing and stops are concerned.

Overall the economic outlook for the US is encouraging, and given ongoing seasonality trends which suggest a strong performance for stocks overall in the final quarter of the year, a period of weakness could provide an interesting buying opportunity with respect to a year-end markup in equity prices. 

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.