Q3 Earnings Season Setup Remains Favorable: What to Know

The Q3 earnings season is poised for a favorable setup, with S&P 500 earnings projected to grow 5.7% year-over-year on 6.1% higher revenues, a notable increase from earlier estimates, driven by a positive estimate revisions trend, particularly in the Finance and Tech sectors. These two sectors, accounting for nearly half of the index's total earnings, have offset negative revisions in other sectors like Basic Materials and Medical. This week's reports from major financial institutions, including JPMorgan and Bank of America, which are expected to show strong individual growth, will be critical in validating these positive trends, following early results from 23 S&P 500 members that already indicate robust earnings and revenue growth.

Analysis

The Q3 earnings season is set for a favorable start, with S&P 500 earnings projected to grow 5.7% year-over-year on 6.1% higher revenues, an upward revision from the 4.2% earnings growth anticipated in July. This positive estimate revisions trend, particularly notable post-COVID, contrasts with the first two quarters of the year, signaling improved corporate performance expectations.

The aggregate positive trend is largely driven by strong revisions in the Finance and Tech sectors, which collectively account for nearly half of the S&P 500's total earnings. Conversely, 10 sectors, including Basic Materials, Medical, Consumer Staples, and Transportation, have experienced downward estimate revisions, indicating a bifurcated earnings landscape.

This week's reports from major financial institutions like JPMorgan and Bank of America are crucial for validating the positive Q4 revisions trend, which also shows half of the 16 Zacks sectors enjoying favorable adjustments since July. JPMorgan is expected to report robust Q3 EPS growth of +10.5% and revenue growth of +5.2%, with estimates revised positively from $4.50 to $4.83 per share over three months. Bank of America's estimates, however, remain largely unchanged.

Early results from 23 S&P 500 members, primarily from fiscal quarters ending in August, show a promising start, with total earnings up +9.1% and revenues up +6.4% year-over-year. A significant 78.3% beat EPS estimates and 82.6% beat revenue estimates, suggesting early momentum, particularly on the revenue side. However, the projected 5.7% Q3 growth, if realized, would mark the slowest pace for the S&P 500 in two years.

Key Decisions for Investors

• Investors should closely monitor the upcoming earnings reports from key Finance and Tech sector companies this week, as their results will validate the positive revisions trend and influence broader market sentiment.
• Consider overweighting sectors with positive estimate revisions, such as Finance and Technology, while exercising caution in sectors experiencing downward revisions like Basic Materials and Medical.
• Evaluate individual company performance within strong sectors, noting the difference in estimate revisions for JPMorgan versus Bank of America, to identify potential outperformers.
• Be aware that while the setup is favorable, the projected 5.7% Q3 earnings growth would represent the slowest pace in two years, suggesting a need for discerning investment choices rather than broad market optimism.