Serious Business: Assessing Earnings Season

Earnings results thus far underscore the strong bifurcation within the market, which is confirmed by the continued deterioration in breadth throughout the current correction.

We're in the midst of reporting season for third-quarter earnings as the market faces its largest decline this year. With the S&P 500®, Nasdaq, and Russell 2000 all mired in correction territory (down by 10% or more from their peaks this summer), earnings season could hold a key to whether the market continues lower or is able to stabilize. Earnings season is at halftime, so let's assess how the season is shaping up thus far and whether it looks like the earnings recession is over.

As shown in the table below, the blended growth rate (which combines already-reported results and estimates for those to come) for third-quarter S&P 500 earnings has risen to 4.3% per LSEG (London Stock Exchange Group) I/B/E/S data. At the sector level, the drags are from Materials, Health Care, and Energy, with the latter accounting for a significant chunk of earnings weakness. Excluding the Energy sector, the blended growth rate is near 10%.

Earnings expectations climbing

A 4.3% growth rate is elevated in comparison to expectations over the past few months, as shown in the chart below. That's a very recent phenomenon courtesy of earnings late last week from Amazon, Alphabet, and Intel which boosted growth to a significant degree. Before those three companies reported, the blended growth rate was 2.6%. Interestingly, alongside the pop higher in third-quarter estimates, the opposite was occurring for fourth-quarter estimates, which have fallen to the lowest in a year.

Third quarter giveth; fourth quarter taketh