What's going on?
Third-quarter earnings season is upon us, fellow Finimizers, and while investors are expecting US profits to decline overall, what’s next for individual companies is yet to be settled…
What does this mean?
According to estimates compiled by FactSet, major US companies’ third-quarter profits will be 4% lower than the same time last year. Forecasted drops like this one have been common among investors this year, who predicted shrinking profits in both the first and second quarters. But higher earnings per share – partly driven by buybacks which reduced the number of shares in circulation – meant companies have all but erased what would have been profit declines.
Companies are pretty good at tempering investor expectations, so they tend to earn slightly more than the predictions say – which in turn often gives their shares a small boost. More important as far as share prices go, of course, are the promises a company makes about future earnings… (tweet this)
Why should I care?
For markets: Banks and tech lead the way again.
Tech companies like Microsoft and Facebook (now considered a “communication services” stock) represent a third of the US stock market – and the sector is expected to reveal falling third-quarter profit. If these companies don’t hint at a pick-up soon, investors might choose to sell their shares – sending the entire market down. At 13% of the stock market, banks are influential too. And since they’re at the coal face of the economy, their outlooks could shape investors’ fourth-quarter thinking.
The bigger picture: Musical shares.
This time last year, investors were worried the low interest rate music the US economy was dancing to would soon stop – and leave growth without a seat to sit on. So come December, their selling had wiped out 2018’s stock market gains. This year, though, investors have bought up safer bonds – so any fresh concerns might not be accompanied by wholesale stock sales.