It looks like 3Q 2017 earnings season is off to an exceptionally strong start, although very few companies have reported yet. Still, almost 80% of the early reporters have beat on both the top and bottom lines, according to data from S&P Global. 3Q 2017 earnings season will pick up steam the week of Oct. 16 and peak the following week as tech companies start reporting and continue through the end of the month and into early November.
CFRA Investment Strategist Lindsey Bell said in a note this week that the markets appear to be already pricing in a lot of the upside that’s expected from the third quarter earnings season. She pointed out that the S&P 500 climbed 4% during the quarter to end at a record high for the index’s eight consecutive quarterly increase. She added that in this year’s first and second quarters, the index climbed by about 5% in the month immediately before the reporting period, starting mid-month in the month before the quarter’s end. Between Sept. 8 and Oct. 4, the S&P climbed by about 3.1%, she added, which means that this trend could be repeating for the third quarter.
As 3Q 2017 earnings season begins, consensus expects earnings for the index to climb 4% year over year, so market sentiment regarding this consensus is good thanks to the roughly 80% beat rate among early reporters so far. Bell expects earnings growth to beat the consensus and adds that the recent gain in the S&P 500 could be in the process of being priced in. She also warns that if this is indeed what’s happening, there could be a bit of a pause in the index’s trajectory as 3Q 2017 earnings season shifts into gear.
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The S&P 500 posted strong gains on Thursday but then started to pause on Friday after the first eight-day winning streak since 2013. Headlines are heaping all the blame on Friday’s pullback in the index on the negative jobs report, but Bell’s report seems to suggest that a pullback was probably coming either way. The jobs report revealed that the U.S. lost 33,000 jobs last month, which was a bit of a shock for the market. However, the two major hurricanes that hit the country last month can be blamed for most of those job losses, so the report is distorted by one-time impacts on the economy.
The S&P 500 continues to move away from the earnings recession which started in 2015 and then bottomed out in the first quarter of last year. The 3Q 2017 earnings season should be the fifth consecutive quarter of growth, Bell believes. As you can see, the 4% growth rate consensus is looking for would be a major deceleration from the first two quarters of this year, which both brought double-digit increases.
Traditionally, Alcoa was used as the unofficial start of earnings season, but since the company’s spin-off, its earnings date has been moved later. Thus, JPMorgan Chase’s report is now the unofficial start of the season, and this time, the bank reports on Oct. 12. Bell expects the 4% consensus for earnings growth to be revised lower before then, and she notes that consensus has trimmed an average of 50 basis points off of growth estimates in the week before the reporting season begins. If the estimate moves in line with the average, it would mean that consensus will move to a 3.5% year-over-year increase in earnings for the index.