The third-quarter earnings season for the S&P 500 is upon us, and investors are bracing themselves for a flood of corporate results that will offer valuable insights into how companies are navigating the current economic and geopolitical landscape. While analysts predict a slowdown in earnings growth, Bank of America’s Ohsung Kwon and Savita Subramanian suggest that this could actually be a golden opportunity for stock pickers.
One of the most noteworthy findings from the latest Bank of America earnings preview is the potential for significant volatility at the individual stock level. The options market has been indicating the largest average post-earnings implied moves for individual stocks since 2021, implying that certain companies could experience dramatic price swings following their earnings releases. This creates an exciting environment for stock pickers, as the analysts note, “implied volatility on the S&P 500 at the index level remains relatively low, which suggests the real action is going to be at the single stock level rather than at the index level this earnings season. It could be a stock picker’s paradise.”
The consensus among analysts is that S&P 500 earnings will grow by 4% year-over-year in the third quarter, representing a notable deceleration from the 11% annual growth reported in the second quarter. This would mark the largest slowdown since the first quarter of 2022. However, Bank of America analysts emphasize that the “bar isn’t high” for companies this quarter. Given the lower expectations baked into earnings forecasts, companies that have successfully managed challenges such as higher interest rates, energy costs, and global supply chain disruptions could see their stocks rewarded, particularly in rate-sensitive sectors.
While the overall earnings growth for the S&P 500 is anticipated to be modest, sector performance will likely vary significantly:
| Sector | Earnings (YoY%) | Earnings (QoQ%) | Sales (YoY%) | Sales (QoQ%) |
|———————-|—————–|—————–|—————|—————|
| Consumer Discretionary | -1.7% | 1.3% | 4.9% | 1.4% |
| Consumer Staples | 0.7% | 0.9% | 1.7% | 4.2% |
| Energy | -20.7% | -2.4% | -2.4% | 0.0% |
| Financials | -0.3% | -9.2% | 3.1% | -22% |
| Health Care | 10.0% | 0.8% | 7.1% | 0.7% |
| Industrials | 1.9% | -5.7% | 2.5% | 0.0% |
| Technology | 15.1% | 6.4% | 11.8% | 4.2% |
| Materials | -4.8% | -16.1% | 4.9% | 3.6% |
| Real Estate | 6.1% | -0.8% | 4.7% | -0.4% |
| Communication Services | 11.3% | 61.8% | 6.9% | 3.0% |
| Utilities | 3.5% | 32.5% | 6.9% | 18.9% |
| S&P 500 | 4.0% | 5.5% | 4.7% | 1.8% |
Early results from the earnings season have been mixed, with 76% of the 21 companies that have reported so far exceeding earnings expectations, 67% exceeding sales estimates, and 62% surpassing both. However, the median earnings beat has been a relatively modest 3.5%, compared to the historical average of 5.4%. This suggests that while companies are exceeding expectations, the magnitude of those beats has been smaller.
Bank of America forecasts that the S&P 500’s mega-cap tech companies (often referred to as the Magnificent Seven) are experiencing a deceleration in earnings growth for the second consecutive quarter. Earnings for these companies are projected to grow by 37% in the third quarter, down from an even stronger pace seen earlier this year. Notably, Tesla Inc. TSLA will be the first of this group to report on October 16, followed by Alphabet Inc. GOOGL and Microsoft Corp. MSFT on October 22, Meta Platforms Inc. META on October 23, Apple Inc. AAPL and Amazon.com Inc. AMZN on October 24. The AI-darling Nvidia Corp. NVDA will unveil its quarterly results on November 19.
Meanwhile, the other 493 companies in the S&P 500 have recently emerged from an earnings recession, posting 8% year-on-year growth in the second quarter. Both groups are expected to see further deceleration in the third quarter.
Looking ahead, Bank of America forecasts that earnings growth will pick up in the fourth quarter, particularly for the 493 non-mega-cap companies. Analysts expect double-digit earnings growth for these companies, fueled by rate-sensitive sectors like manufacturing and housing, which have been negatively impacted by the Federal Reserve’s aggressive rate hikes in recent years.
Political uncertainty is also expected to play a significant role in the upcoming earnings season. According to Bank of America, 110 companies have already mentioned the word “election” in their second-quarter earnings calls, a 62% increase from four years ago. The upcoming November U.S. presidential election may lead to a “wait-and-see” approach to capital investments. However, historical trends suggest investment activity tends to accelerate post-election, particularly if the Federal Reserve has initiated a rate-cutting cycle.
This earnings season promises to be a dynamic one, offering valuable insights into corporate resilience, investor sentiment, and the broader economic landscape. Stay tuned as we navigate this period of volatility and potential opportunity.
