• Chart of the Week: What 3Q Earnings Could Mean for U.S. Stocks

    Chart of the Week: What 3Q Earnings Could Mean for U.S. Stocks

    The S&P five hundred has been in an exceedingly holding pattern since the Gregorian calendar month Brexit vote, commercialism inside a slender varyhowever third-quarter U.S. earnings reports ar unlikely to trigger associate degree upward prison-breaking, we believe. This week’s chart helps justify why.

    Analysts earlier this year were expecting the earnings headwinds of falling oil costs and a stronger U.S. dollar to diminish, driving higher earnings-per-share growth within the U.S. by the tip of 2016. this is often evident within the upward flight of the chart’s blue line throughout the second quarter of 2016, as oil costs rallied and therefore the U.S. dollar weakened.

    No earnings-fueled takeoff ahead

    But this year looks to be no exception to the annual pattern of analysts steady lowering expectations. See the foremost recent downward shift within the chart’s blue line. In fact, analysts have cut third-quarter U.S. earnings expectations by V-E Day since the beginning of the year—bigger than the downward revisions within the initial 2quarters.

    Early third-quarter earnings have crushed these reduced expectations at a higher-than-average rate. nonethelessfewer firms ar raising their future steering than during a typical quarter. Political uncertainty within the U.S. offersfirms additional reason to carry off on investment. companies ar seemingly to specific similar caution on oncequite one third of the S&P five hundred reports earnings.

    Ultimately, we have a tendency to believe earnings beats during this setting won’t be enough to spur a sustained rally, particularly given however high-ticket U.S. valuations ar relative to history. we have a tendency to see bigger clarity on future FRS policy and therefore the political outlook as additional seemingly to drive risk appetency and stock performance within the months ahead.

    Against this background, we like U.S. firms able to increase revenues and earnings during a low-growth world, likeelite technology stocks. We’re cautious of ancient dividend payers and like dividend growers instead. Outside the U.S., we have a tendency to like Asia ex-Japan stocks whose earnings momentum is upbrowse additionalmarket insights in my Weekly statement.

    Richard Turnill is BlackRock’s world chief investment plannerhe's a daily contributor to The journal.

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