“There is talk of the St. Louis Cardinals wining the NL pennant, pumpkins are out on doorsteps, and Noise about the great stock market crashes of Ys 1929 and 1987, meaning October is here” — Paul Ebeling
We cannot be certain if it will be a good month, or a bad month, for stocks. We can be certain that it will be a month filled with lots of earnings news.
The 3-Q earnings reporting period goes into full swing in 2-H of the month and that frame will help determine if October is going to be a good month or a bad month for stocks.
Analysts are projecting strong earnings growth and strong revenue growth in Q-3. Our work shows that the majority of S&P 500 companies will report earnings growth of 28% and revenue growth of 15%.
There have been just 2 other instances since Q-3 of Y 2010 i.e., the prior Quarters when earnings growth has been stronger and only 1 other instance since Y 2008 i.e., Q-4 when revenue growth has been stronger.
These estimates have been increasing.
On 30 June they stood at 24% and 13%, respectively. And they are well above the 5yr average growth rates of 7% and 4%.
The strong growth outlook is a byproduct a byproduct of strong demand.
10 of the 11 economic sectors are expected to report Y-Y earnings growth. The exception is the utilities sector.
The energy, materials, and industrials sectors are anticipated to report the strongest growth of all sectors, though, which speaks to the strength of the cyclical recovery.
It’s a good picture of things to come.
Note: at its record high on 2 September, the S&P 500 was up 5.8% since 30 June. At its low this past Friday, the S&P 500 was down 0.2% since 30 June.
- An expectation that monetary policy is destined to become increasingly less Dovish
- An uptick in longer-dated Treasury yields, which has been driven by tapering expectations and inflation concerns
- Misgivings about Mr. Biden’s infrastructure bills being passed
- Relative weakness in the mega-cap stocks
- China’s regulatory crackdown and economic problems there altering the global growth outlook
A Key item missing on the list above is concern about earnings prospects. It seems hard to believe knowing we are on the cusp of perhaps seeing some of the strongest earnings growth since Y 2010. That is the issue.
There is concern that Q-3 is as good as it is going to get for some time and that there will be a progressive deceleration in earnings growth in coming Quarters because profit margin pressures driven by supply chain constraints, higher prices for raw materials, higher labor costs, and higher transportation expenses will decline.
Companies have been increasingly pointing to such factors as a basis for sounding more cautious about their sales and earnings outlook. The market is concerned that more such warnings will be heard during this Q-3 reporting frame.
But, they have not sounded an alarm about weakening demand, and many have talked about implementing price increases to help offset the impact of higher costs.
The fact that demand remains strong has kept the stock market happy overall about corporate earnings prospects as they are now.
There is an allowance for the notion that earnings growth will slow because of tough comparisons in coming Quarters, but so long as companies are able to convey a continuation of strong demand for their products and/or services, the fallout from warnings about higher costs should be Nil.
Have a prosperous, Keep the Faith!