Curb your enthusiasm about Q3 earnings
Main indexes choppy, but higher; Nasdaq up ~0.8%
Small caps, banks outperform
Cons Disc leads S&P sector gainers; real estate weakest group
Dollar advances; crude, bitcoin both up >2%; gold slips
U.S. 10-Year Treasury yield jumps to ~3.97%
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CURB YOUR ENTHUSIASM ABOUT Q3 EARNINGS
With third quarter reporting season expected to start with earnings from major banks such as JP Morgan JPM.N next week, Deutsche Bank chief U.S. equity and global strategist, Binky Chadha, expects earnings growth for the S&P 500 .SPX to decelerate, with an average beat rate.
Chadha notes that while the macro data points to a resilient economy that is supportive for earnings, he expects earnings growth to slow to 9% in the quarter from the 11.8% in Q2.
One notable headwind, according to Chadha, is lower oil prices and other commodities that will likely have a significant negative impact on energy sector .SPNY earnings, while strength in the dollar should also be a modest headwind.
Another major contributor to the earnings slowdown will come from mega cap growth and tech stocks, which Chadha says is "still strong but continuing to moderate" as growth eased from 38% in Q1 to 29% in Q2 and he forecasts slowing to 24% for Q3.
Chadha does note, however, that his view is for a modest and narrow slowing, while the bottom-up consensus calls for a sharp and broad slowing, which could lead to beat rates of about 5%, the historical average, after running well above over the past six quarters.
Earnings seasons is typically a boost for stocks, climbing 80% of the time, by 2% on average, according to Chadha. But with the S&P already up about 20% year-to-date and 6.8% since the end of the last earnings season, "equity positioning is above average setting a high bar and arguing for a muted reaction," while geopolitical developments and noise around the U.S. elections could also overshadow earnings.
LSEG data shows Q3 S&P 500 expected earnings growth at 5%, and 7.1% when the energy sector is excluded.
(Chuck Mikolajczak)
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