S&P 500 Earnings Season Kicks Off: Why Analysts Call This Quarter 'A Stock Picker's Paradise'

As the third-quarter earnings season for the S&P 500 begins, investors are bracing for a wave of corporate results that will offer a window into how well companies are behaving in a complex economic and geopolitical environment.

Bank of America analysts Ohsung Kwon, and Savita Subramanian suggest that, while expectations for earnings growth are relatively subdued, there could still be significant opportunities for stock pickers.

Stock Picker’s Paradise: Volatility Ahead

One of the most notable takeaways from the latest Bank of America earnings preview is the potential for significant volatility at the single-stock level.

The options market has been pricing in the largest average post-earnings implied moves for individual stocks since 2021, suggesting that certain companies could see outsized price swings following their earnings releases.

On the other hand, “implied volatility on the S&P 500 at the index level remains relatively low, which suggests the real action is going to be at the single stock level rather than at the index level this earnings season. It could be a stock picker’s paradise,” analysts wrote.

Earnings Growth Expected To Slow

The consensus among analysts is that S&P 500 earnings will grow by 4% year-over-year in the third quarter, marking a sharp deceleration from the 11% annual growth reported in the second quarter. This slowdown would represent the largest since the first quarter of 2022.

Bank of America analysts highlight that the “bar isn’t high” for companies this quarter.

With lower expectations baked into earnings forecasts, companies that have successfully navigated challenges like higher interest rates, energy costs, and global supply chain disruptions could see their stocks rewarded, particularly in rate-sensitive sectors.

Sector-by-Sector Breakdown: Where To Look For Strength Or Weakness

While the overall earnings growth for the S&P 500 is expected to be modest, sector performance will vary significantly:

Sector	Earnings (YoY%)	Earnings (QoQ%)	Sales (YoY%)	Sales (QoQ%)
Consumer Discretionary	-1.7%	1.3%	4.9%	1.4%
Consumer Staples	0.7%	0.9%	1.7%	4.2%
Energy	-20.7%	-2.4%	-2.4%	0.0%
Financials	-0.3%	-9.2%	3.1%	-22%
Health Care	10.0%	0.8%	7.1%	0.7%
Industrials	1.9%	-5.7%	2.5%	0.0%
Technology	15.1%	6.4%	11.8%	4.2%
Materials	-4.8%	-16.1%	4.9%	3.6%
Real Estate	6.1%	-0.8%	4.7%	-0.4%
Communication Services	11.3%	61.8%	6.9%	3.0%
Utilities	3.5%	32.5%	6.9%	18.9%
S&P 500	4.0%	5.5%	4.7%	1.8%

Early Results Show Mixed Performance, Focus Shifts From Mag7 To S&P 493

So far, 21 companies, primarily those with August quarter-ends, have reported their third-quarter results: 76% have beaten earnings expectations, 67% exceeded sales estimates, and 62% surpassed both, slightly better than historical averages.

However, the median earnings beat has been just 3.5%, compared to the historical average of 5.4%, suggesting that while companies are surpassing expectations, the magnitude of those beats has been smaller.

Bank of America forecasts that the S&P 500’s mega-cap tech companies (often referred to as the Magnificent Seven) are seeing earnings growth decelerate for the second consecutive quarter.

Earnings for these companies are projected to grow by 37% in the third quarter, down from an even stronger pace seen earlier this year.

Among this elite group of stocks, Tesla Inc. (NASDAQ:TSLA) will be the first to report on Oct. 16, followed by Alphabet Inc. (NASDAQ:GOOGL) and Microsoft Corp. (NYSE:MSFT) on Oct. 22, Meta Platforms Inc. (NASDAQ:META) on Oct. 23, Apple Inc. (NASDAQ:AAPL) and Amazon.com Inc. (NASDAQ:AMZN) on Oct. 24. The AI-darling Nvidia Corp. (NASDAQ:NVDA) will unveil quarterly result on Nov. 19.

Meanwhile, the other 493 companies in the S&P 500 have recently emerged from an earnings recession, posting 8% year-on-year growth in the second quarter. Both groups are expected to see further deceleration in the third quarter.

Looking ahead, Bank of America forecasts that earnings growth will pick up in the fourth quarter, especially for the 493 non-mega-cap companies. Analysts expect double-digit earnings growth for these companies, driven by rate-sensitive sectors like manufacturing and housing, which have been hurt by the Federal Reserve's aggressive rate hikes in recent years.

Political Uncertainty: The Election Effect

Political uncertainty is also expected to play a critical role in the upcoming earnings season. According to Bank of America, 110 companies had already mentioned the word “election” in their second-quarter earnings calls, marking a 62% increase from four years ago.

The upcoming November U.S. presidential election may contribute to a “wait-and-see” approach to capital investments.

However, history suggests investment activity tends to accelerate post-election, particularly if the Federal Reserve has entered a rate-cutting cycle.

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Image created using artificial intelligence via Midjourney.

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