Why 3rd Quarter Earnings Might Just Romp, Sage Predicts

One-shot wonder: New stimulus money and pent-up consumer demand will fuel profits, says economist David Levy. Alas, the 4th period won’t be so hot.

Earnings in the second quarter have been abysmal. But guess what? There’s a chance that, in the third period, profits might bounce back, although the increase should fade in the last quarter.

That’s the take of David Levy, a far-seeing economist who heads the Jerome Levy Forecasting Center. Assuming the COVID-19 spread doesn’t worsen and Congress passes another round of stimulus, “the third quarter looks like a sweet spot for profits,” Levy wrote in his firm’s latest newsletter. He didn’t put any numbers on what kind of boost he expects.

He called the current quarter, which wraps up Sept. 30, a “one-shot wonder.” And the fourth quarter? Things will slack off again.

To investors, who early on wrote off the second quarter wipeout, an earnings surge, however short-lived, would be welcome. With 89% of S&P 500 companies reporting their June-ending results thus far, profits plunged 33.8%, the second worst showing in history, according to FactSet research. (First quarter 2009 holds the record: down 35.4%.)

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In Levy’s assessment, five factors will propel good profits this quarter:

  • Leftover stimulus. The torrent of federal aid that Capitol Hill enacted in March for individuals and businesses has largely been spent, but a decent amount remains on the sidelines. Indeed, the US has seen a jump in its savings rate, which means a lot of dollars are sitting around waiting to be spent on goods and services. While the federal aid’s effects are fading, Levy argued, “the overall boost in the third quarter will be considerable.”

  • New stimulus. Levy predicted the latest Washington package will be less than the $2.2 trillion enacted in the spring, with $1 trillion likely. The money will arrive this month or September, he said. Extra unemployment compensation—it had been $600 before the benefit expired at July’s conclusion—will be less generous, he noted. Democrats are pushing to extend the previous amount, and some Republicans want to drop it to $400 or maybe $300. President Donald Trump has ordered, in the absence of congressional action, additional jobless aid of $400, with the states picking up $100 of that. Big doubts exist, though, about his authority to mandate this.

  • A business production spurt. Because of the spring business lockdown in many parts of the country, companies are only now getting back to speed. Levy called it “the garden hose effect”: Like a crimped hose that gets straightened out, the built-up water pressure first hesitates, then blasts out of the nozzle.

  • Pent-up consumer spending. Postponed buying is now finding an outlet with businesses reopening. What’s more, he added, “even with reopening stalled or set back in many states, people are finding more ways to get out, entertain themselves, and buy things.”

  • Businesses play catch up with inventory. Thesis: Once they resumed operations, companies first ran down inventories and now must replenish them. For instance, Levy observed “rising orders from building suppliers to replace inventory and meet anticipated demand.”

Certainly, Levy pointed out, the pandemic may grow worse and wage cuts could crimp consumer spending. Then, the third quarter will be better than the second, but fall short of its performance in July-September 2019. And this year’s final quarter? Meh. The effect of the stimulus will have faded by then, Levy warned, so don’t expect much.

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