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.
The Final Word on Earnings Season
Yes, after blasting to record highs in September, the market has been choppy so far in October. But that volatility should be resolved by a strong earnings season.
If earnings do broadly crush estimates as we expect, then stocks should find their footing and keep soaring to new highs…
Which means now looks like a really good time to prepare for another market rally.
In our view, the best stocks remain AI stocks.
The AI Boom is only getting stronger, folks. Despite the rumors about a potential bubble, this boom just keeps booming – and with substance, not hype.
OpenAI just launched the world’s first AI model capable of complex reasoning (a huge breakthrough) and followed that up by closing a $6.6 billion fundraising round – the biggest VC fundraising round ever.
Taiwan Semiconductor (TSM) – the world’s largest chipmaker – just reported a better-than-expected 39% increase in Q3 sales, a sign that robust demand for AI chips is not slowing down at all.
Alphabet (GOOG) introduced a new AI tool called NotebookLM, which, frankly, we think could be as value-additive to workflows as ChatGPT.
Meta (META) debuted its new Meta AI tech in several new countries. Amazon (AMZN) is rolling out more AI features into its shopping and logistics businesses. Nvidia (NVDA) just said demand for its new Blackwell AI chips is “insane”; the chips are backordered for 12 months!
As I said before… the AI Boom just keeps booming.
So, what stocks will perform best this earnings season? AI stocks. Though, of course, some will soar far higher than others.
Learn about a few of our favorite picks for the current moment.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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