The US stock market’s impressive 2023 rally is about to face a critical test as Q3 earnings season approaches. With the S&P 500 hovering near record highs after a 20% surge year-to-date, investors are eager to see if corporate earnings can justify the market’s rich valuations.
Can Strong Earnings Sustain the Market Rally?
Analysts predict that S&P 500 companies will report an average earnings growth of 5.3% for Q3 2023 compared to the same period last year. While this represents a decline from the 8% growth projected earlier this year, experts believe the market is poised for a positive surprise.
Economic Indicators Signal Potential Earnings Outperformance
Several recent economic indicators suggest that companies may exceed earnings expectations. The September jobs report significantly surpassed forecasts, adding 250,000 jobs against an expected 150,000. Additionally, the ISM Services PMI reached a surprising 54.9, the highest reading since February 2023, indicating robust growth in the services sector.
“I actually think we’re going to have a stronger than expected earnings season,” says Eric Lynch, managing director at Scharf Investments. He attributes this optimism to the recent uptick in economic data, which contrasts with the weaker economic prints observed earlier in the summer.
Lowered Expectations Could Pave the Way for Positive Surprises
The lowered earnings projections could set the stage for companies to easily beat expectations, a trend often observed in previous quarters.
“Traditionally, corporations do ultimately exceed expectations because they do in fact lower that bar,” notes Lynch.
In Q2 2023, S&P 500 companies posted an impressive 11% earnings growth, with several sectors exceeding expectations. Notably, financials and healthcare sectors witnessed earnings growth of 18% and 17% year-over-year, respectively.
All Eyes on Big Banks as Q3 Earnings Season Kicks Off
As the Q3 earnings season commences, investors will closely scrutinize the performance of major banks, particularly JP Morgan Chase. While the recent 50 basis point Fed rate cut is expected to benefit banks in the long run, its impact on Q3 earnings remains uncertain.
Analysts will be keenly watching for signs of increased loan activity and improvements in net interest margins. Additionally, credit provisioning for potential loan losses will be a key area of focus.
Goldman Sachs Raises S&P 500 Forecast – Is 6,000 Realistic?
Goldman Sachs recently upgraded its S&P 500 forecast for the third time this year, predicting the index to reach 6,000 within the next three months. While this target might seem ambitious given the current market conditions, Lynch believes it is achievable if earnings continue to outperform expectations.
“If earnings can continue broadening out and if companies are generally outperforming as 5% consensus estimates, yeah that’s that’s not we’re not that far away from it,” Lynch remarks.
He acknowledges that the S&P 500’s current price-to-earnings ratio of 23-24 is high but argues that the equal-weight S&P 500, which averages the performance of all constituent companies, trades at a more reasonable 18-19 multiple.
FAQs
Q: What is earnings season?
A: Earnings season refers to the period when publicly traded companies release their quarterly financial results. It typically occurs four times a year.
Q: Why is Q3 earnings season important for the stock market?
A: Q3 earnings season will provide crucial insights into the financial health of corporate America and whether the current market rally is justified.
Q: What are the key factors to watch during Q3 earnings season?
A: Investors will focus on earnings growth, revenue performance, profit margins, and future guidance provided by companies.
Q: What is the outlook for the stock market after Q3 earnings season?
A: The stock market’s performance after Q3 earnings season will largely depend on the overall strength of corporate earnings and the outlook for the remainder of the year.
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