Why This Earnings Season Could Send Stocks Soaring

The third-quarter earnings season has officially begun, kicked off today by big-name banks like JPMorgan (JPM), Wells Fargo (WFC), and BlackRock (BLK). All topped earnings expectations. 

Now, this is just a taste of the results to come. But despite the market’s uncertainty surrounding inflation and incoming rate cuts, we’re confident this earnings season will help power stocks to fresh record highs over the next few weeks. 

Fueling our bullish outlook is the attractive setup preceding this reporting season.

For the past few months, earnings estimates have been falling. Back in July, analysts expected earnings across the S&P 500 to rise about 7.4% in the third quarter. That fell to 4.7% by late September. Now it sits at just 4.2%. 

In other words, earnings growth estimates for Q3 have dropped from ~7% to ~4% over the past two to three months. 

We attribute those falling estimates to worries about the economy. After all, recession fears really flared around August and September. 

So, while earnings estimates have crashed on recent recession fears…

The economic data shows that those fears are overblown. 

A Broad Economic Overview

Last month, job growth picked up significantly, while the unemployment rate dropped. Indeed, as noted by CNBC, “Nonfarm payrolls surged by 254,000 in September, up from a revised 159,000 in August.” And joblessness slid to 4.1% from August’s 4.2%.

Meanwhile, average hourly earnings rose 4%, with inflation running just above 2%. That means real wages rose almost 2% last month – their biggest jump in years. 

And the all-important ISM Manufacturing and Services surveys – great proxies for manufacturing and services economic activity – both reported huge jumps in their New Orders indices for September. The manufacturing survey registered 46.1% in the index, up from August’s 44.8%. And the services’ New Orders Index expanded to 59.4%, markedly higher than August’s 53% reading.

Clearly, the economic data has meaningfully strengthened recently. In fact, Citi’s Economic Surprise Index – which broadly measures how economic data compares to expectations – has risen from nearly -50 in July (its lowest since summer 2022) to +15 today (its highest since April 2024). 

In other words, while estimated Q3 earnings growth has dropped from ~7% to ~4% since July, the relative strength of economic data has improved for multi-year lows to multi-month highs. 

That means Q3 earnings estimates are too low. 

Companies will likely crush estimates this earnings season and will sound far more positive than expected about current business trends. 

And, of course, that all means stocks should push meaningfully higher this earnings season.