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Macroscope | Too soon to say about an S&P 500 rally despite surprise US earnings boost
- Most third-quarter US earnings reports outdid expectations but serious headwinds are ahead given the strong dollar, China’s Covid-19 policy and Europe’s situation
- Investor concern over inflation and higher interest rates will also put pressure on company valuations and stock prices
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Listed US companies are reporting better-than-expected earnings for the third quarter, giving investors some respite from inflation concerns and the recent rise in Treasury yields. Improved investor sentiment sent the S&P 500 up by 8.1 per cent over the last two weeks of October, before the latest Federal Reserve interest rate push sent it down again.
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More than three quarters of S&P 500 companies have reported their earnings, with around 60 per cent outperforming expectations of their operating earnings per share (EPS), mainly driven by continued strength in the industrial sector, and supported by other higher growth sectors such as information technology and health care.
We estimate that the average third-quarter EPS for S&P 500 companies will rise to US$53.23 (US$45.39 for the S&P Ex-Financials, which measures a broader market), up 2.3 per cent on the year and 13.6 per cent on the quarter. Factors such as higher energy prices, a resumption of summer travel, positive industrial production and retail sales data support the strong earnings estimates.
But there are also considerable macroeconomic headwinds that could cause earnings to fall short of projections. The US dollar strengthened 16.7 per cent year on year during the quarter, which, coupled with deteriorating conditions in Europe and uncertainty over the Covid-19 policy in China, could weigh on foreign-sourced sales.
Early earnings reports have also noted additional headwinds of softening consumer demand and higher prices, increasing labour costs, higher freight costs and a build-up of excess inventory.
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The energy sector is expected to lead the earnings growth due to higher crude oil and natural gas prices in the third quarter. Similarly, estimates indicate a strong quarter for the industrial sector.
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