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On the eve of a new earnings season, it seems that quarterly results are far from the forefront of investors’ minds.
After a positive jobs report and consumer inflation data that failed to allay concerns about rising prices, there is more confusion than usual about what the Federal Reserve will do next with interest rates. Hopes for Chinese stimulus measures and their ripple effect have been revived, but even there the picture remains murky, as evidenced by the extreme volatility of Chinese shares. Add to that a few literal hurricanes and a figurative hurricane in the Middle East, and investors have a lot to consider when making decisions.
Oh, and one more thing: the presidential election. Election years tend to be tough when it comes to October stock returns.
“An upcoming US election, a surprise boost from China and a widening conflict in the Middle East will continue to exaggerate Macro and its highly uncertain uncertainties versus Micro this earnings season,” Evercore ISI’s Julian Emanuel wrote in a recent note to its customers.
It’s that typical election-related weakness that has Emanuel expecting the S&P 500 to test 5,538 points before rising toward 6,000.
As earnings reports start to roll out, first from banks today and more broadly next week, Bank of America thinks investors will look past the current noise.
“I think this earnings season is going to be quite tough,” Ohsung Kwon, U.S. and Canadian equity strategist at Bank of America, said in a recent interview. “I don’t think the big focus is on the third quarter. Everyone actually knows that the third quarter wasn’t a very strong macro environment… So I don’t think the bar is that high, but the focus isn’t really on the third quarter either. It’s really about the prospects of companies on the other side of the curve. Now that the easing cycle has begun, what will companies say about the first signs of improvement given the lower interest rate environment?”
All that said, stocks can still benefit from disappointing data and higher forecasts, Kwon wrote in a note to investors. He expects earnings for the S&P 500 to rise 4% year over year in the third quarter, a sharp slowdown from the 11% gain in the second quarter. (Evercore estimates forecast profit at 6.5%).
Wherever the various strategists’ forecasts end up: “As long as companies have weathered the macroeconomic headwinds and are seeing early signs of improvement from lower interest rates, stocks should be rewarded,” Kwon wrote.
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