“US Earnings Season“: What We Can Expect

“US Earnings Season”: What We Can Expect

With their financial figures for the third quarter of 2024, the major US financial institutions have opened the US earnings season. Four times a year, analysts, investors, and market observers are tasked with drawing conclusions from the companies’ quarterly figures. Expectations are high this time, and so is the potential for disappointment. However, the season started promisingly. By the end of October, around 300 US companies from the S&P 500 index – including mega-caps like Alphabet (Google’s parent company), Amazon, Apple, Meta Platforms (formerly Facebook), or Microsoft – will have disclosed their reports, which corresponds to two-thirds of the total market capitalization.

It’s not only the absolute numbers and the changes compared to the previous year or previous quarter that are crucial, but rather, the expectations of earnings that were meticulously collected and published by various financial data providers should be exceeded. The so-called “earnings surprises” significantly influence stock market reactions, with negative earnings surprises usually causing particularly strong negative price reactions.

Earnings Growth: Expectations Doubled

In the third quarter of the previous year, the average earnings growth of the 500 largest US companies was around 5%. For the third quarter of the current year, the expectations for earnings growth are about twice as high (Source: Bloomberg, as of 10/11/2024). This level of expectation naturally increases the chance of negative surprises. However, the “season kick-off” by the major US financial institutions went well this time.

JP Morgan earned around 13 billion USD in the past quarter and can boast a solid return on equity (ROE) of around 17%. For the fourth consecutive year, the largest US bank by assets is also number one in customer deposits. At Wells Fargo, the overall quarter was very positive, even though net interest income fell by 11% year-on-year (Source: Bloomberg, as of 10/11/2024). The company scored points with lower than expected provisions for bad loans.

The Bank of New York Mellon, the oldest surviving bank in the United States specialized in wealth management and securities services (est. 1784), also exceeded expected earnings figures but had to make significantly higher provisions for potential loan defaults (Source: Bloomberg, as of 10/11/2024).

BlackRock, the world’s largest investment manager, exceeded analysts’ high earnings expectations and marked a new record with around 11.5 trillion USD in assets under management (AuM) (Source: Bloomberg, as of 10/11/2024).

Stock reactions were extremely positive, with the exception of the Bank of New York Mellon. While the S&P 500 Financial Sector Index closed up 1.95% on that day, the shares of Wells Fargo, JP Morgan, and BlackRock were significantly higher.

Kathrein Equity Strategy

Kathrein also relies on the so-called “earnings surprise” factor in its stock selection. Based on the top-rated analysts worldwide, the “Smart Estimate Score” is calculated. The contribution to relative outperformance or underperformance historically depends significantly on the size of the positive or negative earnings surprise. If it is possible to filter out those companies that are likely to positively surprise and avoid those that are likely to disappoint, this approach can be advantageous compared to an index portfolio (precise replication of a stock index).

Your Kathrein Private Banker can provide you with insight into the stock selection strategy of the portfolio management team if you are interested.

This information represents a market overview and the market opinion of Kathrein. It does not constitute financial analysis and includes no direct or indirect recommendation for the purchase or sale of securities or an investment strategy. Investing in securities involves price fluctuations and thus potential capital losses at any time. Information and performance depiction with reference to the past do not allow for reliable conclusions about future results. No guarantee can be made for the accuracy of the data used here despite careful research.