How Much Do Q3 Earnings Really Matter?

By: Spencer Israel

The Q3 earnings season is here. For the next four or so weeks, investors will be offered more clues about which companies are making it through this pandemic/economic crisis and which are not. 

Heading into the season, one theme that sticks out is the lack of clarity in terms of guidance from companies themselves. In a typical year, an average of 170 companies would have provided guidance for the current quarter, according to I/B/E/S data from Refinitiv. In Q2, that number was 65. This quarter, it’s 73. 

That lack of clarity has a snowball effect as it pertains to analyst expectations. For example, Refinitiv pointed out that of those companies that did provide guidance for their most recent quarter, more than half were “positive” meaning they were above estimates. And for the Q2 earnings season, 82% of S&P 500 companies beat expectations, the highest since 1994 when Refinitiv began tracking this data.

So was this a case of companies firing on all cylinders in the midst of a pandemic? Or were analysts simply too bearish last time around? More than likely, it’s neither. With limited guidance from companies, analysts simply don’t have as much information off which to build their estimates.

Even if you want to put weight into whether a company “beats” or “misses” on its Q3 earnings, there’s also the question of how much these earnings we’re about to get even matter right now. In addition to backward-looking financials, investors are also having to navigate a Presidential election and global pandemic. Against this backdrop, the quality of a company’s third quarter may do little to change sentiment in the grand scheme of things. 

Case in point, the financials this week. JP Morgan, Citigroup, Bank of America, Goldman Sachs, and Wells Fargo have all reported for the third quarter. Of the two headline numbers for each company—earnings per share and revenue—only Wells Fargo’s EPS and Bank of America’s revenue missed expectations. 

And yet each stock, with the exception of Goldman Sachs (up 0.2%) is down in the aftermath of their report. Bank stocks continue to be out of favor—earnings reports above expectations have done little to change that fact. 

This isn’t to say there won’t be trades to make in the run-up and aftermath of a report. But if you’re counting on the Q3 earnings report to change the narrative of a given stock or sector, don’t hold your breath. The market needs a little more clarity on the macro picture first. 

Below is a schedule of the most notable earnings reports for next week. 

Monday 10/19
Before the opening bell
Halliburton (HAL)

After the closing bell
IBM (IBM)

Tuesday 10/20
Before the opening bell
Proctor & Gamble (PG)

Lockheed Martin (LMT)
Philip Morris (PM)
Travelers Companies (TRV)

After the closing bell
Netflix (NFLX)
Snap Inc (SNAP)
Texas Instraments (TXN)

Wednesday 10/21
Before the opening bell
Abbot Laboratories (ABT)
Verizon (VZ)
Biogen (BIIB)

After the closing bell
Tesla (TSLA)

Thursday 10/22
Before the opening bell
Coca-Cola (KO)
AT&T (T)
Southwest Airlines (LUV)
American Airlines (AAL)

After the closing bell
Intel (INTC)
Mattel (MAT)

Friday 10/23
Before the opening bell
American Express (AXP)

The author is long the S&P 500 in his retirement account. 

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