A new season: what to look for in Q3 earnings reports
Wednesday, October 11, 2023 by Stephanie Guild, CFA
Steph is a Wall Street alum and head of investment strategy for Robinhood.
When the seasons change, you also get a chance to make a change. You get to put on a jacket you haven’t worn in months, or a sweater that hasn’t been outside in a while. If you wanted to, you could even see stepping into these “new” clothes as stepping into a new you—the person you want to be, not what someone else thinks you should be.
Maybe I was just inspired by listening to a podcast with Rick Rubin (a day one of hip hop), where he shared how if he wanted to get a fresh perspective on a song he was working on with an artist, he wouldn’t just have them take a break. He would, instead, change their perspective—shut off the lights, or ask them to sing for a different person or passion. Big or small, the shifts, he said, often worked.
We’ve got earnings season coming up (actually technically kicked off yesterday with Pepsi) in earnest on Friday, with the banks. I believe earnings season, despite all the reasons to be negative, may provide the shift in perspective needed to potentially lift stocks into year end.
Expectations are for the S&P 500 to post earnings of $56 per share for the third quarter and $221 per share for the full year. If expectations are correct, that is only a $2 increase from 2022 earnings. Below are the earnings expectations for this year and next year:
While both show expectations have fallen some over the year, they’ve gotten a little more positive for 2024 (in red) since the end of July. In addition, the expected increase from 2023 (the difference between the blue line and the red line) is noticeably greater than the historical average. Both reasons why I think we can see a rally this quarter—but the bar (and risks) is higher for next year.
With this new season, here’s what I’ll be taking note of:
Reported earnings and cash flow per share during the quarter, relative to history and expectations. This will tell the trajectory a company is on and the sentiment the market has on it. For example, if a company has done much better than expected the last couple quarters, it could be a sign it’s underestimated and vice versa.
Commentary about the future. Maybe even more important is commentary from company management on how they see the next quarter going so far. Often if a company has good earnings, but lowers their guidance for the future, their stock price will go down. The opposite can be true as well.
Implications from higher interest rates. With the 10 year treasury yield higher today than last quarter, the impact of higher interest rates on a company’s ability to borrow without it impacting their profits is important. Comments made in earnings statements for conference calls on this specifically are more important than they’ve been in over a decade.
In particular, this will be closely watched in the banking sector given the issues earlier in the year related to losses from higher interest rates.
The same goes for a company’s customers. If they are seeing decreased demand due to higher rates that’s also noteworthy. This will be of particular interest for credit card companies, for example.
Implications from lower inflation (but higher energy prices). As discussed in a previous post, lower inflation, while good for us as consumers, could make a negative impact on certain companies that are unable to sell their goods for prices that cover the rising costs from consistent wage growth—and even rising energy prices.
So mark down when your stock investments are reporting to keep track of it and their progress. And think about what you might want to shift in your portfolio, as well as your perspective, this next season. Maybe you’ll even find some money in that jacket from last year, as a treat for that new perspective.
Here’s
one of many sources to find out when your stocks are reporting earnings.
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