Reuters / Lucas Jackson
- The S&P 500 looks on track to have the strongest earnings season since the third quarter of 2021.
- 82% of S&P 500 firms that have reported earnings so far have beat expectations, according to FactSet.
- Earnings are telling markets four things about the state of the economy, Bank of America says.
Corporate earnings look just fine this quarter – and that's saying a few things about the US economy's future.
Bank of America in a note on Monday pointed to so-far resilient earnings season, despite earlier concerns on Wall Street over a sustained slowdown in corporate profits.
Of the 81% S&P 500 companies that have reported results for the third quarter, 82% reported earnings above analysts' estimates, according to FactSet data, putting this earnings season on track to be the strongest since 2021.
It spells good news for stocks, and it could tell investors four key things about the US economy, according to Bank of America strategists.
1. The US could still avoid a recession
The economy could be on its way to a soft-landing, and companies have already gone through the worst of the slowdown in earnings growth. .
"The economy is cooling, but companies have had their earnings recession, have cut costs, and are now enjoying margin expansion," strategists said.
There are still concerns that sluggish consumer demand could drag earnings lower, with real sales currently shrinking at an annualized pace of 2%. But earnings growth has accelerated to notch 4% year-per-year this quarter, the bank said, a sign that profits have bottomed out and are about to tread higher.
What's more, history shows that earnings tend to recover faster than they fall, the strategists said, and downturns "usually remove excess capacity, resulting in leaner cost structure and improved margin profiles."
2. The economy could see a productivity boom
Nonfarm labor productivity accelerated 4.7% quarter-over-quarter. Meanwhile, revenue per worker in the S&P 500 is approaching its highest level since 2008, despite sales slowing down.
"The upgrade cycle and domestic investments amid re-shoring point to a potential productivity boom ahead," the bank said.
The bank notes that mentions of "re-shoring" in earnings calls have skyrocketed, implying greater domestic capital expenditures by companies.
3. Earnings expectations are better than they seem for the fourth quarter
Earnings expectations for the fourth quarter have be slashed 3.5% since the start of October, but half of that was stemming entirely to Pfizer and Merck, two pharmaceutical firms that are facing "idiosyncratic risk," Bank of America analysts said.
Across the rest of the market, 2024 earnings per share expectations have held up to the historical average. Analysts are expecting just a 0.6% decline, compared to the usual 1.2% decline in earnings.
4. There are still worries about the state of the US consumer
There are still concerns about a weakening US consumer as spending slows amid dwindling pandemic-era savings, with the potential to hurt corporate profitability.
Companies that beat earnings expectations outperformed the S&P 500 by 126 basis-points the day after reporting their financials, lower than the 147 basis-point average.
Meanwhile, companies in the consumer discretionary and staples sectors were punished when they beat earnings by less than Wall Street was expecting: On average, consumer discretionary firms with subpar beats underperformed the S&P 500 by an average 129 basis-points, while staples underperformed the index by 85 basis-points.
The punishment was even more severe when companies missed earnings expectations entirely, with consumer discretionary underperforming the S&P 500 by 351 basis-points, while staples underperformed by 242 basis-points.
Investors, though, are still waiting on the rest of S&P 500 firms to report their financials over the next few weeks. That includes 22% of the consumer discretionary sector, 30% of the tech sector, 37% of small-cap stocks, and 29% of mid-cap stocks, Bank of America strategists said, which could give more insight on the overall macro environment.