Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>
Here are the key points:
We are off to an excellent start in the Q3 earnings season, with the bank-heavy sample of results at this stage of the reporting cycle not only beating estimates but also providing a very reassuring read-through about the macroeconomic backdrop.
One of the key questions that market participants have been grappling with lately is whether the start of the Fed’s easing cycle will be enough to steer the economy towards a soft-landing outcome.
Results from the banks have been beneficial in providing favorable guidance on that count, with JPMorgan JPM suggesting that the economy was already going through such a growth phase. At the same time, Bank of America BAC called its in-house projected GDP growth pace in the +1% to 2% range over the current and coming quarters as a no-landing outcome.
JPMorgan and Bank of America are hardly outliers in providing this goldilocks macro view, as most of the industry players noted a stable consumer spending environment and shared nothing they saw as problematic concerning their loan portfolios or the broader economy.
The earnings power of these banks has been constrained for a while now, and the Q3 results are in line with that trend. Q3 earnings at JPMorgan were down -1.9% from the year-earlier period, while the same at Bank of America were down -11.6%.
Q3 earnings for the Zacks Major Banks industry, which includes JPMorgan, Bank of America, and other major banks, are expected to be down -3.6% from the same period last year on +0.6% higher revenues. The table below shows this blended earnings picture for the constituent industries of the Zacks Finance sector, with the growth rates representing a blend of the reported results with the still-to-come results.
Image Source: Zacks Investment Research
As you can see here, the positive growth for the sector is coming from the insurance and brokerage/asset management industries. However, the earnings outlook of the insurance space has taken a hit with the recent run of active storm season.
Looking at Q3 as a whole, combining the actual results that have come out with estimates for the still-to-come companies, total earnings for the S&P 500 index are now expected to be up +3.6% from the same period last year on +4.6% higher revenues.
The Q3 earnings growth pace would improve to +5.8% had it not been for the Energy sector drag (decline of -24.2% for Energy). On the other hand, quarterly earnings growth for the index would drop to +0.6% once the Tech sector’s hefty contribution is excluded (earnings growth of +11.4% for the Tech sector).
The quarterly earnings growth pace is expected to improve from next quarter onwards. You can see this in the chart below that shows the overall earnings picture on a quarterly basis.
Image Source: Zacks Investment Research
The chart below shows the overall earnings picture on an annual basis.
Image Source: Zacks Investment Research
Please note that this year’s +7.7% earnings growth on only +1.8% top-line gains reflects revenue weakness in the Finance sector. Excluding the Finance sector, the earnings growth pace changes to +6.9%, and the revenue growth rate improves to +4.2%. In other words, about half of this year’s earnings growth comes from revenue growth, with margin gains accounting for the rest.
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