Three Trends to Watch as Earnings Season Kicks Off

As the fourth quarter of 2024 comes to a close, investors eagerly await the start of the earnings season, with JPMorgan Chase & Co. set to report on January 12, 2025. Despite the ongoing focus on the Biden-Trump election and potential Covid stimulus plans, the earnings season could be more robust than initially anticipated. Here are three trends to watch as earnings season unfolds.

1. Earnings Surprises and Guidance

Analysts expect S&P 500 companies to report earnings of $32.97 per share, down 22% from the same quarter a year ago. However, this may underestimate actual earnings, as companies have become adept at guiding analysts' expectations. In the past four quarters, about three-fourths of S&P 500 companies have beaten earnings forecasts, with 85% beating estimates during the second quarter by an average of 20%. This trend is expected to continue in the third quarter, with companies like Bank of America, Delta Air Lines, and UnitedHealth Group reporting soon.



Deutsche Bank strategist Binky Chadha notes that the increases in earnings estimates have come primarily from energy stocks rebounding from losses and smaller loan-loss provisions at banks. If these factors are excluded, underlying growth is expected to fall 13%, only slightly better than the second quarter's 15% drop. However, this may not reflect the actual earnings growth, as the Atlanta Fed's GDPNow model forecasts a 35% rise in GDP as of October 6, 2024. So far, 90.5% of the 21 companies that have released earnings this quarter have topped expectations, with the same percentage topping revenue forecasts. This bodes well for a rebound in profits and sales from the worst of the coronavirus crisis.

2. Market Sentiment and Individual Stock Performance

While earnings season historically has been a good time to own stocks, with the S&P 500 averaging a 4.1% rise during the last four reporting periods, individual stocks may struggle when they release earnings. UBS strategist Keith Parker notes that the 15 companies that reported earnings through October 2, 2024, dropped an average of 1% on the trading day following their releases, despite 13 of them beating sales forecasts. This suggests that the bar is high for individual stocks, with a 10% sales beat seeming to be a cut-off for positive stock returns.



3. Company Guidance and Valuations

With the S&P 500 trading at about 21 times next year's average earnings estimates, faster earnings growth is the most likely path higher for stocks. Company guidance for the fourth quarter and beyond could play a big role in keeping the price/earnings ratio manageable and stocks moving higher. Further upside revisions would be helpful in maintaining investor confidence and driving stock prices up.

As earnings season kicks off, investors should keep a close eye on Goldman Sachs Group, which is expected to report a profit of $5.44 per share on October 14, 2024. KBW analyst Brian Kleinhanzl has a more optimistic estimate of $6.15 per share, expecting Goldman's trading and investment banking businesses to remain strong and the bank to have enough capital to please regulators. This could lead to shares outperforming at earnings.

In conclusion, as earnings season begins, investors should watch for earnings surprises and guidance, market sentiment and individual stock performance, and company guidance and valuations. By staying informed about these trends, investors can make more informed decisions and capitalize on opportunities in the market.