Market Beat: Third-quarter earnings reporting
Now that the third quarter has come to a close, corporate earnings reporting will get going in full swing over the next few weeks. Many of the major financial and industrial companies will report this week. To date, about 5% of S&P 500 companies have reported their results. The forecast is for earnings growth to contract again.
According to data from FactSet, earnings are expected to decline by 4.1% on a year to year basis in the third quarter. If the earnings do in fact decline this quarter, it will be the first time in about four years that we’ve had three consecutive quarters of negative earnings growth. The last time we had three consecutive quarters with earnings contraction was the fourth quarter of 2015 through the second quarter of 2016. Two important factors that are contributing to the drop in earnings are foreign exchange rates and tariffs. Earnings growth is expected to pick up in the fourth quarter and early 2020.
Corporate earnings are the main driver of stock prices, although of course they are dependent on the state of the economy. The economy appears to be in a slow growth mode and that is something that could continue for a while.
The FOMC, the Federal Reserve Open Market Committee will have two more meetings this year on interest rate policy and most people expect to see further reduction in the Fed funds rate. They’ll meet this month and again in December. After the last Fed meeting, Chairman Powell said that they could return to a program of quantitative easing again to stimulate the economy if needed. The Fed’s balance sheet was at about $5 trillion before they started some quantitative tightening, in other words buying back some bonds to reduce the size of the balance sheet. Today the balance sheet is at about $3 trillion and the markets generally have a positive reaction to quantitative easing or QE.
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The unemployment rate is at 3.5%, which is a fifty year low, but we are seeing some other signs that the economy is slowing down somewhat. Manufacturing as measured by the ISM Index is below fifty which indicates that manufacturing is contracting. Last month, the ISM Index had a reading of 47.8 and it hasn’t been that low since June of 2009. The Industrials sector only represents about 10% of the market but its earnings can provide some economic insight.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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