CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 66% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 66% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

Q3 US Earnings Season Preview: the 3 big issues to watch this reporting period

Profits are expected to have grown strongly in Q3, but a weaker growth outlook and higher costs are posing a risk to future earnings.

When is US reporting season?

US reporting season will kick-off in earnest the week beginning the 11th of October 2021 and extending into the middle of November.

What are the 3 biggest issues to watch this quarter?

Earnings growth is still tipped to be solid

Analysts are estimating another relatively robust quarter for profit growth. According to data obtained from Bloomberg Intelligence, EPS growth for Q3 will come in roughly at 24% on annualised basis, with average EPS of $49.22. As has been the case in recent quarters, the strongest growth is tipped to have come from cyclical stocks, that have benefitted from the reopening of the US economy, with industrials and materials forecast to deliver the strongest EPS growth.

Consumer stocks are tipped to underperform the relative to the rest of the market, with consumer discretionary EPS projected to contract, perhaps due to the impact of reduced direct stimulus from the US government to households.

Earnings growth is expected to be lower than last quarter

At an estimated $49.22 per share, EPS is expected to be lower this quarter than last quarters $52.98. Though this gap is likely to be bridged by corporates exceeding pre-earnings season forecasts, last quarters extraordinary earnings growth, which saw annualised EPS growth at its highest since 2009, is unlikely to be replicated.

This is somewhat to be expected given the baseline effects of the Covid-19 recession that saw EPS capitulate in Q2 2020. But it also speaks of the slower expansion in growth in the US, with analysts currently tipping that nominal EPS won’t return to Q2 2021 levels until Q2 2022, in line with recent downgrades to the economic outlook in the United States.

The most important factor of all could be profit margins

A perhaps overlooked driver of the post-pandemic bull market has been the extraordinary growth in profit margins across the US 500 which saw the average profit margin across the index jump to nearly 14%. It’s come courtesy of huge demand, thanks to the unprecedented level of fiscal stimulus pumped directly into the US economy by the government to drive it through the pandemic.

That dynamic is reversing now however, as historically high margins peak as growth slows, and worse, become eroded as the supply shock of the pandemic drives major cost-push inflation. Arguably, it’s this reason why we’ve seen such pessimism reflected in stock prices recently, as investors discount more persistent cost pressures moving forward, that will continue to compress margins. It may prove the most important question overall this reporting season: how big are problems in rising costs, how persistent will they be, and how will they impact margins?

S&P500: Index eyes 50-day MA as price momentum stays skewed to the downside

Confronted by what many in financial markets have referred to as a “wall of worry”, the S&P500 has trended lower in recent weeks, as the combined effects of fears about slowing growth, supply disruptions and inflationary pressures, tighter monetary policy, Chinese financial instability, and gridlock in Washington weakens sentiment.

This earnings season will allow investors to return to company fundamentals, to quantify the material impacts of these macroeconomic factors, and discount how they might influence corporate earnings in the future. Price momentum for the S&P500 currently looks skewed to the downside, with the daily RSI below 50, though that indicator is suggesting the potential for a break-out to the upside. The 50-day MA at 4438 will be the crucial level to watch to gauge whether the market has further scope to resume its primary uptrend. Beyond that 4478 is the next key level of price resistance. On the downside, price support sits at the 100-day MA at 4357, and 4277 and 4228.

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This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. 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. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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