CEOs and Analysts Are at Odds About S&P 500’s Earnings Outlook

(Bloomberg) — There’s an unusual divergence in Corporate America’s profit outlook this season: while analysts have cut forecasts, company guidance points to another strong quarter.

Data compiled by Bloomberg Intelligence show analysts expect S&P 500 firms to report a 4.2% increase in third-quarter earnings versus a year earlier, down from a 7% forecast in mid-July. Guidance by the firms, on the other hand, implies a jump of about 16%.

Gina Martin Adams, chief equity strategist at BI, said the dichotomy was “unusually large,” and the significantly stronger outlook suggests “companies should easily beat expectations.”

“Margins should keep marching higher as companies emphasize efficiency amid economic uncertainty,” she wrote in a note. Momentum on earnings-per-share guidance has also turned positive, with a BI model showing a score of 0.14 for the three months through September, compared with a post-Covid average of 0.03.

Meanwhile, a Citigroup Inc. index of earnings revisions showed strong negative momentum in September, dipping to its lowest level since December 2022. Despite analysts’ fears, the S&P 500 hit another record high on Friday and is up 22% in 2024, its best start to a year since 1997.

That’s a hint that investors are not deterred by the reduced forecasts and instead betting that this earnings season will once again deliver positive surprises, just like it did in the first quarter when expectations were for 3.8% growth and it turned out to be 7.9%.

The reporting period started on a positive note. JPMorgan Chase & Co. cleared the lowered bar after it delivered a surprise gain in net interest income for the third quarter and raised its forecast for the key revenue source. The stock was up about 4.5% post-earnings on Friday, while Wells Fargo & Co. rose 5.6%, showing the impact of falling interest rates were not as bad as feared.

“Several large-cap bank stocks had de-risked in mid-September ahead of earnings season,” wrote Morgan Stanley strategists led by Michael Wilson in a note on Monday. “This fostered a lowered expectations bar into the quarter. Initial results from earnings season indicate that banks are clearing that bar.”

To be sure, there have been some warning signs. Earlier this month, Nike Inc. moved to reset Wall Street’s expectations ahead of new Chief Executive Officer Elliott Hill’s arrival, withdrawing its full-year sales guidance. And in late September, FedEx Corp. tumbled after warning that its business would slow in the year ahead.

“The main focus is companies‘ outlook on the other side of the curve now that an easing cycle has begun,” wrote Bank of America Corp. strategists Ohsung Kwon and Savita Subramanian in a note last week, cutting their S&P 500 EPS forecasts for 2024 to $243 from $250. “The bar isn’t high. As long as companies have managed through macro headwinds and see early signs of improvement from lower rates, stocks should get rewarded.”

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Investor focus will eventually turn to the Magnificent Seven group of stocks that largely fueled the rally this year, including Apple Inc. and Nvidia Corp. Consensus expects their profits to rise about 18% from a year ago, a slowdown in the pace of growth — at 36% — seen in the second quarter. The group has underperformed since the second-quarter reporting season and has been trading sideways more recently as the S&P 500 rally broadened.

“The fundamental reason for the underperformance of Mag 7 could simply be the deceleration in EPS growth from the very strong pace last year,” said Morgan Stanley’s Wilson. “If earnings revisions show relative strength for the Mag 7, these stocks will likely outperform once again and market leadership may narrow — like it did during the second quarter and all of 2023.”

–With assistance from Farah Elbahrawy.

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