The equity market declined on Friday afternoon for the second consecutive week following a report that the U.S. was considering banning U.S. pensions from investing in Chinese stocks and potentially delisting Chinese stocks from U.S. exchanges. Friday’s lower finish left the S&P 500 Index down 1.0% for the week. The use of international fund flows is a new turn in the trade standoff. Trade talks between the U.S. and China are still scheduled for October.
The third quarter ends this week and, barring significant changes on the last trading day, the S&P 500 Index, Dow Jones Industrials, and NASDAQ should all post modest gains for the quarter. The Russell 2000 (small cap) and International stocks are on track to post modest declines. Stocks are still likely to trade on economic and geopolitical headlines for the next week or two with the September employment report and other economic data on the calendar, as well as any updates on U.S.—China trade.
With the quarter ending, we will soon see third quarter company earnings reports move to the forefront. Current consensus expectation is for a year-over-year decline in earnings for the S&P 500 Index. Consensus earnings are expected to decline 2.2% year-over-year on a 3.7% increase in revenue. We breakdown the upcoming earnings season below in our Dissecting Headlines section.
Financial Market Update
Dissecting Headlines: Earnings Season
The market consensus expectation for corporate earnings (using the S&P 500 Index as a proxy) for the third quarter is a year-over-year decline of 2.2%. Expectations for both the first quarter and second quarter were for year-over-year declines as well, but most companies reported upside earnings relative to consensus expectations and the S&P 500 Index posted year-over-year increases in both quarters.
Revenue for the third quarter is expected to increase 3.7%. There are a lot of moving parts between revenue and earnings per share that can impact these expectations. Individual company actions can impact volumes, prices, profit margins, tax rates, share repurchases, and other factors that in turn impact earnings per share growth. Expectations also differ by sector. The energy, materials, and information technology sectors are expected to show the largest declines, while the financial, real estate, and health care sectors are expected to show earnings growth.
If earnings do show a decline for the quarter, you may begin to hear talk of an “earnings recession”. An earnings recession is when there is a two quarter consecutive decline. As of now, the consensus expectation for the fourth quarter is for 4.1% growth, but that may change during the third quarter reports as companies update their forward guidance and analysts update their future expectations.
The majority of earnings announcements will be between mid-October and early November. We will continue to update expectations weekly in our Market Commentary.
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