What strong 3Q results say about the US economy: BofA

• The S&P 500 is poised for its strongest earnings season since the third quarter of 2021.
• According to FactSet, 82% of S&P 500 companies that have reported earnings so far have beaten expectations.
• According to Bank of America, earnings tell markets four things about the state of the economy.

LoadingSomething is loading.

Thanks for registering!

Access your favorite topics in a personalized feed on the go. Download the app

Corporate earnings are looking pretty good this quarter – and that says a lot about the future of the US economy.

Bank of America noted in a note Monday that its earnings season has been steady so far, despite earlier concerns on Wall Street about a continued decline in corporate earnings.

Of the 81% of S&P 500 companies that reported third-quarter results, 82% reported earnings above analysts’ estimates, according to FactSet data, meaning this earnings season is on track to be the strongest since 2021.

That’s good news for stocks and could tell investors four important things about the U.S. economy, according to Bank of America strategists.

1. The USA could still avoid a recession

The economy may be headed for a soft landing, and companies have already seen the worst of the slowdown in profit growth behind them. .

“The economy is cooling, but companies are past their earnings recession, have cut costs and are now enjoying margin expansion,” strategists said.

There are still concerns that sluggish consumer demand could reduce profits, with real sales currently shrinking by 2% annually. But profit growth accelerated to 4% a year this quarter, the bank said, a sign that profits have bottomed out and are poised to rise even further.

Additionally, history shows that profits tend to recover faster than they decline, the strategists said, and downturns “typically remove excess capacity, leading to a leaner cost structure and better margin profiles.”

2. The economy could experience a productivity boom

Non-agricultural labor productivity increased by 4.7% compared to the previous quarter. Meanwhile, sales per worker in the S&P 500 are nearing their highest level since 2008, despite declining sales.

“The modernization cycle and domestic investment as it relocates point to a potential productivity boom,” the bank said.

The bank notes that mention of “re-shoring” in earnings releases has skyrocketed, suggesting greater domestic capital spending by companies.

3. Fourth-quarter earnings expectations are better than they seem

Fourth-quarter profit expectations have been cut 3.5% since early October, but half of that came entirely from Pfizer and Merck, two pharmaceutical companies that face “idiosyncratic risks,” Bank of America analysts said.

Across the rest of the market, expectations for 2024 earnings per share have remained at historical average. Analysts expect just a 0.6% decline, compared to the usual 1.2% profit decline.

4. There are still concerns about the state of U.S. consumers

Concerns remain about weakening U.S. consumers as spending declines due to dwindling pandemic-era savings and potentially hurting business profitability.

Companies that beat earnings expectations outperformed the S&P 500 by 126 basis points the day after their financials were released, below the average of 147 basis points.

Meanwhile, companies in the consumer discretionary and consumer staples sectors were penalized when they beat earnings by less than Wall Street expected: On average, consumer discretionary companies with below-average beats underperformed the S&P 500 by an average of 129 basis points, while consumer staples underperformed outperformed the index by 85 basis points.

The punishment was even harsher when companies completely missed earnings expectations, with consumer discretionary stocks underperforming the S&P 500 by 351 basis points while consumer staples underperformed the S&P 500 by 242 basis points.

However, investors are still waiting for the rest of the S&P 500 companies to report their financial results in the next few weeks. That includes 22% of the consumer discretionary sector, 30% of the technology sector, 37% of small-cap stocks and 29% of mid-cap stocks, Bank of America strategists said, which could provide more insight into the overall macroeconomic environment .