3Q earnings: What to expect
Federated Investors’ Phil Orlando on how President Trump’s trade war with China and the midterm elections will impact the stock market.
Third-quarter earnings season is about to begin, and expectations are lofty even after two consecutive quarters of stellar corporate earnings growth.
According to research notes provided by Goldman Sachs, analysts forecast sales growth of 11 percent, which, coupled with lower tax rates will combine to generate 21 percent earnings per share (EPS) growth. While robust, the upcoming earnings growth will be lower than the first two quarters of the year, where EPS increased by 24 percent and 26 percent in the first and second quarters, respectively.
How could earnings surprise to the upside?
As written in Goldman’s “US Weekly Kickstart” note, analysts underestimated the impact of tax reform on earnings during the first half of 2018 by 200 basis points, adding that it could represent a source of positive EPS surprise in the third quarter.
With the economy firing on all cylinders, robust economic activity could also support a positive upside surprise. “The ultimate driver of corporate sales growth is underlying economic activity,” Goldman’s analysts wrote, bringing up Federal Reserve Chairman Jerome Powell’s weekend speech to the National Association for Business Economics, where he said the outlook is “remarkably positive.”
Friday’s jobs report provided just the latest piece of evidence of just how solid the U.S. economy is, with the country’s unemployment rate falling to 3.7 percent from 3.9 percent, its lowest since 1969.
America's gross domestic product advanced by 4.2 percent in the second quarter, and consumer confidence hovered around an 18-year high in September.
While there are many positives to expect another robust earnings season, the analysts brought up some cautionary notes, particularly how companies’ margins could be pinched. They note that labor costs will continue to rise and put downward pressure on the margins of many companies, and higher interest rates will weigh. They noted that rising yields should weigh on firms with high debt loads and that higher rates should translate to higher interest costs.