End of Corporate America’s Profit Recession Comes With Concerns

Investors are growing more confident that a year-long slump in profits for Corporate America is about to end. Yet a fragile economic outlook, wary consumers and the highest interest rates in 16 years mean any relief for stocks could be short-lived.

Analysts predict the companies in the S&P 500 will report a 1.2% drop in third-quarter earnings — the fourth straight decline — before a 6.5% rebound in the final three months of the year, according to estimates compiled by Bloomberg Intelligence.

US Profit Recession Seen Ending in Third Quarter

Unusually, estimates have risen going into the reporting season, a sign of confidence that has lifted the S&P 500 by 0.9% in October after back-to-back monthly drops. If companies surpass those predictions, as they usually do, third-quarter earnings may even increase.

“A slightly better outlook for S&P 500 earnings should finally emerge in the third quarter, but the recovery is still fragile and lacks breadth,” said Gina Martin Adams, chief equity strategist at Bloomberg Intelligence. While the momentum of estimate revisions has picked up, margins outside the energy sector “need to firm” and the outlook for sectors sensitive to the economic cycle needs to improve “for stocks to derive confidence,” she said.

That confidence may be hard to come by. Shoppers and companies alike are feeling the pinch from higher interest rates, while the economy in China — long an engine of growth for the world — is struggling to get in gear. Even luxury goods-makers such as LVMH are warning of slowing demand after holding up under high inflation. And the conflict between Israel and Hamas has the potential to disrupt the world economy.

Here’s a look at some themes investors will be focused on as they parse earnings reports.