US Q3 results season: Wall Street braced for slower growth
With results season kicking off on Friday, many believe the emphasis will be on how businesses have changed since the Federal Reserve cut interest rates in September.
9th October 2024 13:55
by Graeme Evans from interactive investor
The start of the rate-cutting cycle means third-quarter earnings may not be the biggest deal for Wall Street investors when the S&P 500 results season gets under way on Friday.
Bank of America believes the focus will be on how corporate outlooks have changed since the Federal Reserve launched policy easing with a hefty 0.5% rate cut in September.
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Caution earlier in the quarter has already left Wall Street braced for earnings to show a sizeable deceleration in annual growth to 4% from 11% in the second quarter.
The bank said: “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.”
Both the Magnificent Seven and the other 493 constituents of the S&P 500 are forecast to report slower earnings growth, particularly as year-on-year comparisons have toughened.
The group of mega-cap stocks, which includes NVIDIA Corp (NASDAQ:NVDA), Apple Inc (NASDAQ:AAPL) and Tesla Inc (NASDAQ:TSLA), saw its growth rate decline for the second quarter in a row to 37% in the three months to June. The rest of the S&P 500 emerged from its earnings recession by growing 8%.
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Friday’s results focus is dominated by the US economy bellwether JPMorgan Chase & Co (NYSE:JPM), including its thoughts on the trajectory for net interest income and margins heading into 2025.
Loan demand, credit quality and potential for a rebound in investment banking on the back of lower rates and potential US soft landing are factors that could sway its share price.
When chair and chief executive Jamie Dimon last presented results in July he warned that inflation and interest rates may stay higher than the market expects.
He added: “While market valuations and credit spreads seem to reflect a rather benign economic outlook, we continue to be vigilant about potential tail risks.
“The geopolitical situation remains complex and potentially the most dangerous since the Second World War — although its outcome and effect on the global economy remain unknown.”
The other big focus will be on the race for the White House and how the 5 November election is impacting investment intentions. In a sign of a wait-and-see approach, Bank of America said 110 companies mentioned “election” in second-quarter earnings - up 62% on four years ago.
It said: “History suggests that investment activity typically accelerates post-election. We believe the election could be a clearing event for companies to unleash capital expenditure, especially with lower rates.”
Other key topics are likely to be the inventory cycle, consumption trends, China’s outlook, easing FX pressure, labour strikes and the Florida hurricane.
The bank expects 2025 earnings to grow 13% as rate-sensitive sectors such as manufacturing and housing enjoy top-line growth, resulting in higher margins from operating leverage.
It adds that artificial intelligence (AI) capital expenditure will be a bigger tailwind for the market than trends in “idiosyncratic” AI monetisation.
That view is backed up by UBS Global Wealth Management, having predicted that the results season could be a “beat-and-raise” quarter for tech and AI companies.
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The bank said today: “Both Alphabet Inc Class A (NASDAQ:GOOGL) and Meta Platforms Inc Class A (NASDAQ:META) highlighted the risks of underspending, rather than overspending, on AI during the second-quarter reporting season, and our analysis shows that big tech’s combined capex intensity (capex divided by sales) is still below historical peaks.
“Additional support from a range of customers like other cloud platforms, enterprises, and sovereign entities also underscores our positive outlook on AI semiconductor firms.”
It expects overall AI semiconductor industry revenues to grow from $58 billion (£44 billion) in 2023 to $168 billion by the end of this year, and to $245 billion by the end of 2025.
Key dates in the earnings calendar include Alphabet and Microsoft Corp (NASDAQ:MSFT) on 22 October, Tesla on 23 October, Amazon.com Inc (NASDAQ:AMZN) on 24 October, Meta Platforms on 30 October and Apple on 31 October.
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