Why 3Q Earnings May Undershoot Estimates | Chief Investment Officer

The third-quarter earnings season is underway, and it looks as if the results will be good. But maybe not quite as good as analysts predict. Equities guru Sam Stovall warns that the September-ending quarter could end up disappointing.

In fact, the recent three-month period “could become only the second quarter out of the past 49 to see actual results undershoot end-of-quarter estimates,” CFRA’s chief investment strategist writes in a research note. Still, the expected earnings jump is already very high, so a small decline would hardly be a disaster. But, some argue, it could be a harbinger of reduced returns in the future.

Right now, the analysts’ prediction is for a 24.4% year-over-year rise in earnings per share (EPS), per S&P Capital IQ, although Stovall doesn’t put a number on what he thinks the actual outcome will be. At this juncture, the only S&P 500 sectors with anticipated EPS declines are consumer discretionary and utilities.

The reasons for the third-quarter undershoot are the bearish litany we’ve all heard lately: supply chain snarls, wage hikes, and commodity price increases, Stovall reasons. Plus, he points to weakening gross domestic product (GDP) growth estimates and a much softer-than-projected rise in September non-farm payrolls.

Since the bull market kicked off in early 2009, the benchmark index has logged quarterly EPS growth that exceeded analysts’ expectations in 47 of 48 quarters, missing only in 2020’s pandemic-stricken second period, the CFRA report says. “Will Q3 of 2021 be #48?” Stovall wonders.

Meanwhile, current estimates for next year are more modest than for 2021. The S&P 500 EPS increase is expected to rise just 8.8%, compared with 40.3% for all of calendar 2021, Stovall points out.

Of course, earnings are traditionally the major driver of stock prices. The S&P 500 energy sector has returned the most this year, says Yardeni Research—51.8% as of last Friday. In second place are financials, up 33.9%

“The energy sector is going to experience a windfall in the third quarter” for EPS, CFRA figures. And that, the research note goes on, will be “a welcome change from the small loss in the year-ago quarter.” The propellant: much higher oil prices. Crude finished Monday slightly above $82 per barrel, which is double the level of 12 months ago. Some energy bulls see oil topping $100 in the near future.