The Q3 earnings season kicked off last week.
Earnings in the US have nicely benefited from increased demand globally this year, especially from robust Emerging Market economies.
If the remaining reports continue the trend thus far, Q3 will be added to the increasing number of quarters with positive S&P 500 earnings growth.
Positively for US companies, there are plenty of tailwinds to help support continued growth in the months ahead.
It's an exciting (and largely unfamiliar) time for San Francisco Giants fans as the team advances to the National League Championship Series. Less unfamiliar territory for investors is corporate earnings' winning streak—which looks likely to continue if early Q3 reports are any indication.
The Q3 earnings season kicked off last week and, according to Bloomberg, 27 out of 37 reporting S&P 500 companies (or 73%) so far have beaten analysts' earnings expectations. Major players in their industries have not only topped Q3 earnings forecasts but also see healthy growth in the quarter ahead. This is a nice change from previous reports, in which positive earnings were typically paired with cautious outlooks.
Earnings in the US have nicely benefited from increased demand globally this year, especially from robust Emerging Market economies. Trade activity in some regions is higher than pre-crisis levels, and trade barriers are falling worldwide—a net positive for companies selling goods globally.
If the remaining reports continue the trend thus far, Q3 will be added to the increasing number of quarters with positive S&P 500 earnings growth. Q4 2009 S&P 500 earnings were 209% higher from the previous year, Q1 2010 earnings rose 58% year-over-year, and Q2 earnings grew by 39% year-over-year.* Additionally, quarterly earnings have soundly and consistently beat analysts' expectations since Q1 2009—and the continually positive surprises should chip away at the still-prevalent caution, which could boost stock prices.
Positively for US companies, there are plenty of tailwinds to help support continued growth in the months ahead. Just one example, the recent lifting of the Gulf drilling ban could be a sign of political retreat from some actions negatively impacting businesses. Makes sense to us if you want companies to hire again (and if you want to win midterm electoral votes over the unemployment issue). This is typically the time in a president's term when he tends to moderate, and that could be good for legislation.
Also, as we've noted, today's cash-rich corporations will eventually be tempted to spend idle funds on upgrading technology, investing in additional capital goods, research, expansion, etc.—especially when coupled with the accommodative lending environment provided by easy monetary policy and strong investor demand for corporate bonds pushing down yields. This spending spurs additional business activity in the economy.
Speaking of easy monetary policy, central banks around the world continue to remain flexible and willing to support recovery—with some speculating the Fed may unleash more quantitative easing next month. Additionally, Emerging Markets look likely to continue to show strong demand for goods, with China reporting record crude imports for September.
These several quarters of earnings growth should help assuage fears of a weak or stagnant US economic recovery and, coupled with the tailwinds for future growth, should help spur on the bull market's charge. To us, there's nothing like cheering on underdogs—so to that, go US corporations and go Giants!
*Source: Thomson Reuters