Q3 Earnings season - good, but not enough. What to expect?

The results of Q3 companies should be very good, but that does not mean they will be good enough to drive investors closer to the top.

The reporting season begins next week and again, the combination of strong economy and corporate tax cuts will result in very strong growth. For SP500 companies, Thomson Reuters analysts expect an average Q3 profit growth of 21.6% over the past year. This is not as strong as 24.9% in Q2, but data is considered to be one of the best in history.

The problem of the strong upward momentum of the indices, which suggests very good and record data, is that investors are well aware of the effect of tax cuts and record sales of companies. As a result, companies' ability to bring a positive surprise drops dramatically. Wall Street's consensus forecast for the SP500 is that the index does not exceed a 7.2% growth by the end of the year, accumulating a good Q3 and eventually a Christmas rally.

Meanwhile, there are some additional risks to index growth. A tight labor market leads to higher wage costs, as well as to the difficulty of many companies finding the specialists they need. The dollar rose by 5% against the major currencies in Q3. This will affect the sales of the export-oriented companies selling their commodity in USD. Tariffs could also have a negative impact on some of the companies as China responded to the US and imposed its own tariffs on US exports.

While none of these are likely to lead to significant losses in overall performance, some sectors may see overall deterioration. And in general, this may be enough to shake investor confidence.

At the moment, days before the start of the reporting season, the trend for the SP500 is definitely Long, and any adjustment provides a good prerequisite for purchases. In a bad earning season, I expect the index to adjust to the basic ascending diagonal where we can look for new purchases.

Source: WSJ

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