Resilient Economy and Strong Consumer Demand Expected to Boost Third-Quarter U.S. Earnings

A positive outlook is on the horizon for the U.S. stock market as the third-quarter earnings season approaches. With a resilient economy and strong consumer demand, experts predict a slight rise in earnings, potentially providing a much-needed boost to the stock rally that has faced challenges in recent months.

According to LSEG IBES, S&P 500 companies are expected to report a 1.3% increase in earnings compared to the same period last year. This growth, although modest, marks a turnaround after three consecutive quarters of flat or declining profits. Investors are hopeful that this positive trend in earnings will support the stock market, which has experienced a 6% decline from its late-July highs but remains up by approximately 12% year-to-date.

The economy has shown resilience despite concerns over rising interest rates and the Federal Reserve’s potential decision to maintain high rates for an extended period. Recent data, including the monthly U.S. jobs report for September, indicates robust economic strength. With employment rising by the most in eight months, consumer demand is expected to remain intact for the time being.

Inflation, which dampened company earnings in the first half of the year, is expected to ease in the third quarter due to comparatively robust economic growth. This positive economic backdrop has allowed companies, particularly the largest ones, to pass on price increases and maintain strong margins.

Investors will closely monitor earnings reports for signs of increased costs resulting from higher interest rates, which could potentially hinder companies’ borrowing and growth capabilities. However, if earnings remain strong and interest rates stabilize, the stock market could experience a positive shift.

The earnings season kicks off with major U.S. banks, including J.P. Morgan Chase, reporting their results. Other notable companies, such as Delta Air Lines, PepsiCo, and UnitedHealth Group, are also expected to release their earnings reports in the coming weeks. Additionally, the impact of artificial intelligence on businesses and the potential for improved outlooks will be a key theme during this earnings season.

Analysts anticipate a 6.0% rise in technology sector earnings and a significant 33.8% increase in earnings for the communication services sector, making it the sector with the highest growth rate. Furthermore, investors will pay close attention to fourth-quarter outlooks, with expectations of a 10.8% year-on-year increase in S&P 500 earnings.

While the economy has defied expectations of a downturn this year, some investors remain cautious, anticipating potential cracks as rate hikes start to take effect. The consumer discretionary sector, which is expected to show a substantial 23.1% increase in earnings, will be closely watched as an indicator of consumer spending patterns.

In conclusion, the third-quarter earnings season is poised to provide a much-needed boost to the U.S. stock market. With a resilient economy and strong consumer demand, companies are expected to report modest growth in earnings, potentially reversing the recent decline in stock prices. Investors will closely analyze the earnings reports for insights into the impact of interest rates and the business outlook, while remaining cautiously optimistic about the future of the market.