Upward Revision: Optimism Ahead of Earnings Season
In a recent third-quarter earnings preview, Savita Subramanian, chief equity strategist at Bank of America, presented a forecast that exceeds prevailing market expectations. She projects that S&P 500 companies will report year-over-year earnings growth of 32% for Q3, notably higher than the consensus estimate of 27%.
Three Factors Supporting the Bullish Outlook
Subramanian points to several favorable conditions as the earnings season begins:
- Estimates Are Rising: Over the past three months, Q3 earnings expectations have been revised upward by approximately 1%, an uncommon pre-season adjustment.
- Strong Corporate Guidance: She highlights that forward-looking corporate guidance has been "unusually robust," providing fundamental support for potential earnings beats.
- Benign Macro Backdrop: The overall macroeconomic environment in Q3 has been supportive for corporate profit growth, with economic activity maintaining its recovery pace.
A Caveat: The Dollar as a Growing Headwind
Despite the optimistic tone, Subramanian introduces a note of caution. She specifically notes that the U.S. dollar has recently "shifted to a slight headwind." For the many S&P 500 companies with substantial international operations, a stronger dollar typically reduces the converted value of their overseas revenue, creating potential pressure on reported earnings.
"The tricky part may still lie ahead," she suggests, indicating that the currency factor, along with other potential cost pressures, could pose greater challenges in subsequent quarters. Investors focused on growth figures are advised to also monitor how forex fluctuations impact actual corporate profitability.