Corporate earnings season begins amid uncertainties
The U.S. economy, though strong, continues to face sizable challenges. America’s ongoing trade disputes, rising interest rates and a softening global economy all threaten to prematurely halt our robust pace of economic growth.
For investors, these concerns were painfully manifested in the recent and punishing sell-off in the stock market. On October 3, the Dow Jones Industrial Average (Dow) finished a 3-day rally to close at 26,828.39 – an all-time high. However, six trading days later, the Dow had fallen more than 1,700 points, losing almost 7 percent of its value. The tech-heavy NASDAQ stock market lost almost 9 percent of its value.
Despite these challenges, expectations still remain high for the latest corporate earnings season, which began just over a week ago. Earnings season is a roughly 4-week time period when the majority of corporations release their results for the prior quarter. For most companies, this will be the July-September third quarter. Each company’s earnings (profits) and sales revenues, among other data, will be dissected by the markets to justify the current price of the company’s stock.
In the third quarter, corporate earnings are expected to have increased by 19.3 percent over the prior year. This would be the third highest earnings growth rate since the first quarter of 2011, but below the second quarter’s growth rate of 24.9 percent. For perspective, corporate earnings increased by just 1.3 percent in 2016 and 12.7 percent in 2017.
A strong third quarter earnings season would continue the stellar earnings data U.S. corporations have reported so far this year. More importantly, for investors, it would convey the U.S. economy and corporations continue to absorb the impact of rising interest rates and escalating trade disputes.
Equally important to the actual third quarter earnings results will be corporate America’s future projections for earnings growth. Many in the financial community, including policymakers at the U.S. Federal Reserve, expect U.S. economic growth to begin tapering some time next year. According to data provided by Thomson Reuters, the growth rate for corporate earnings is expected to fall from 19.3 percent in the third quarter to 17 percent in the fourth quarter. For all of 2019, the earnings growth rate is expected to fall to just 10.5 percent.
So far, the initial burst of third quarter corporate earnings has been positive and encouraging. However, we’ve yet to see key results from America’s manufacturing sector – which has faced the brunt of our ongoing trade disputes. In the following weeks, industry heavyweights such as General Motors, Boeing, Lockheed Martin, John Deere and Caterpillar should provide some clarity on the current and projected state of America’s economic health.
Mark M. Grywacheski, Investment Advisor
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Quad Cities Investment Group, LLC is a registered investment advisor with the U.S. Securities Exchange Commission.
