• A new earnings season on Wall Street kicks off this week
  • The expected earnings growth rate for the S&P500 (US500 on xStation5) for the third quarter has declined due to natural disasters
  • It still may be the fifth consecutive quarter of yoy earnings growth of S&P500 and the actual results usually beat forecasts 
  • S&P500 is at record highs and the fourth quarter is historically the strongest period of the year for the benchmark

Third-quarter earnings season starts on Wall Street this week with reports from major banks. Investors expect that earnings growth rate for this period will reach 2.8% yoy, while revenues are to rise by 4.9%. The earning growth rate declined substantially over the course of the last month and at the end of June the estimates pointed out at the yoy increase of 7.5%. The main reasons for that are natural disasters such as hurricanes in the US and earthquake in Mexico which hit insurers in particular. 

Speaking of individual industries Energy is set to outperform the rest, followed by Techs and Materials. Moreover, investors should bear in mind that outlook for the world’s economy has improved. According to the OECD forecasts, the global GDP is expected to increase by 3.5% compared to 3% in 2016. Additionally, the US dollar was amid the weakest G10 currencies in the third quarter. It means that the companies with higher global exposure are thought to post better results than competitors that are mainly focused on the domestic market.

One should also remember that actual earnings tend to beat initial estimates. Let’s look at the last five years. In this period reported earnings surpassed forecasts by 4.2% on average. Thus, investors cannot rule out that the earnings growth rate for the third quarter will reach about 6% yoy. What’s interesting, it could be the fifth consecutive quarter when the S&P500 companies manage to post higher profits.

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 It may be the fifth consecutive quarter of yoy earnings growth of S&P500 and the actual results usually beat forecasts. Source: FactSet

2017 has been so far a very good year for Wall Street. S&P500 has added about 15% year-to-date. Interestingly, the index set new record highs in September despite the fact that this month statistically is one of the weakest for the benchmark. Bulls may be even more encouraged as the fourth quarter on average brings the highest returns for S&P500. Whilst it doesn’t have to translate into rallying beyond current records, the deeper correction is statistically unlikely to occur in the following three months. On the other hand, common valuation ratios such as P/E indicate that the benchmark is overbought to some extent – it’s trading at 18.0x, whilst 5-year average amounts to 15.6x and 10-year average is 14.1x.

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 The fourth quarter is statistically the best period in a year for S&P500. Source: Marketwatch

Let’s look at the US500 (S&P500 underlying) chart. The index has been in the distinct trend for years and since the first quarter of 2017 we could draw a tight upward channel. Having a little correction in August and assuming that the benchmark will move in a similar way as from April to July, the bulls may aim at 2580 pts. On the flipside, a lower bound of the channel should act as the nearest support.

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 S&P500 remains in a strong bullish trend. Source: xStation5

Investors will pay close attention to bank’s reports – Citigroup (C.US), Wells Fargo (WFC.US) and Bank of America (BAC.US) are scheduled to publish their third-quarter earnings this week.  It’s also worth looking at the Netflix (NFLX.US)  figures given its fast growth and importance for the tech sector.

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 In upcoming two weeks we will get earnings from banking sector. Source: Bloomberg, XTB Research