Growing Optimism for Corporate Profits Amidst Economic Recovery

After a prolonged period of concern over a potential recession, there is finally a glimmer of hope in the air as Wall Street's outlook for companies' quarterly results takes an upward turn. Analysts, who typically lower their profit forecasts as earnings season approaches, have, for the first time in two years, increased their projections over the past two months, according to a recent report by FactSet.

While skeptics still exist, the report highlights that Wall Street analysts have raised their third-quarter earnings per share estimates for the 500 companies in the S&P 500 Index during July and August. FactSet's Senior Earnings Analyst, John Butters, pointed out that this was the first time since Q3 2021 that there has been an increase in bottom-up EPS estimates during the first two months of a quarter.

Specifically, estimates for third-quarter earnings per share rose by 0.4% from June 30 to August 31. Similarly, fourth-quarter estimates also saw a 0.6% increase over the same period. This positive trend is significant considering that normally estimates tend to drop as earnings dates draw near and optimism wanes.

Amidst this shift, the Federal Reserve has signaled a "noticeable slowdown" rather than an impending recession. The recent August jobs report suggested that the Fed might be able to halt its rounds of interest-rate hikes, which have been instrumental in curbing consumer borrowing and spending power while tackling inflation.

In an interesting finding from the FactSet report, executives seem to be talking less about a potential recession. An analysis of earnings call transcripts revealed that from June 15 through August 31, there has been a continuous decline in the number of S&P 500 companies mentioning the term "recession" on their earnings calls for four consecutive quarters.

However, despite the growing optimism, JPMorgan analysts maintain a more cautious view, suggesting that the collective corporate profit outlook for 2024 may be too optimistic. Additionally, other analysts with a bearish stance have shifted their recession expectations to next year.

Overall, while there are still differing opinions, the increasing optimism surrounding corporate profits reflects a positive shift in the market's perception of the economy. As we move ahead, it will be essential to monitor how these projections align with the actual quarterly results and whether the economic recovery continues its upward trajectory.

This Week in Earnings

Only two S&P 500 companies are set to report quarterly results in the week ahead, according to FactSet. The companies reporting results this week include:

1. Docusign Inc. (DOCU)
2. Smith & Wesson Brands Inc. (SWBI)
3. C3.ai Inc. (AI)
4. Gitlab Inc. (GTLB)

The Call to Put on Your Calendar

Questions for Kroger on 'Disinflation,' Consolidation

Grocery-store chain Kroger Co. reports results on Friday. The results, as they have been over the past year, will put the spotlight on the ebbs and flows of inflation. Price increases have squeezed consumers, while helping profits for food producers and grocery stores. Kroger, in June, said it had made "targeted" price cuts to help customers hit harder by inflation — helping it compete against other stores while threatening the bottom line. And while executives said that inflation had begun to ease, they said they believed that the spending backdrop "will remain challenged for our customers as they deal with higher interest rates and an uncertain economic outlook." Meanwhile, Kroger's merger deal with Albertsons Cos. Inc. continues to draw concerns about higher prices, competition, and consumer access.

The Number to Watch

GameStop Results

GameStop Corp. didn't hold a conference call following its quarterly results in June. But the drama surrounding the video-game retailer and meme stock played out in other ways. GameStop in June fired its chief executive, and activist investor Ryan Cohen became executive chairman. In July, it announced the resignation of its chief financial officer, who left last month. Ahead of the company's second-quarter results, set for Wednesday, Wedbush analyst Michael Pachter cited hardware growth for Nintendo and Sony, and a "compelling" software slate, and noted the company's roughly $1.3 billion of net cash. But he said GameStop "appears to have lost market share in recent quarters."