Q3 earnings season lookahead: let the good times roll

US earnings season is upon us once more, with US companies forecast to report yet more good numbers, making it a positive for the ongoing bull market.

US trader
Source: Bloomberg

Third quarter (Q3) reporting season is expected to see growth of 3.2% in earnings for US firms, which would make a significant drop from the 13.6% and 11.1% reported in the first and second quarter respectively. In late June, earnings were forecast to grow by 6.2%, so the downward revision has been quite drastic, but not as severe as that seen in prior quarters.

Over the previous two quarters, S&P 500 rallied hard into earnings season, gaining 4% into first quarter (Q1) and around 5.2% into Q2. A similar performance has manifested itself in recent weeks, as the index gains 4.9% from its August lows. A pause, therefore, could be in the offing as investors focus their attention on upcoming earnings.

The recent improvement in US data, typified by the robust reading from the September ISM manufacturing index, which hit its highest level since 2004, with all sub-indices growing, underlines the expectations of good performance for US companies this reporting season.

The weaker US dollar will provide a tailwind for earnings as well. US companies selling overseas will have found the environment of the past year much more congenial, as predictions of a great dollar rally were not just wrong, but out by a country mile. As UK firms discovered after Brexit, a weak currency can be great for flattering earnings and boosting share prices, even if it does increase the cost of imported components and goods.

What that means for indices is that we will likely see further gains towards the end of the year, as companies beat expectations that have been steadily guided lower. This might be something of a theatrical performance, but in the last analysis indices will be driven higher by the outperformance of companies that beat expectations. 

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa 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. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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