We are approaching the busiest part of the third-quarter earnings season, with nearly 50% of U.S. companies scheduled to report next week. So far, only 21% of U.S. companies have reported. While it may still seem too early to make a meaningful assessment, initial results point to better-than-expected earnings growth, with third-quarter EPS growth of +44% year-over-year, and it is encouraging that the combined third-quarter EPS of the S&P 500 is starting to trend higher.

86% of S&P 500 companies that have reported exceed EPS estimates. EPS growth for these companies is +44% year-on-year, a positive surprise of 13%. Materials and Discretionary are recording the highest growth among sectors, with the caveat that very few companies have reported to date in both cases. Top-line growth is reaching +16% year-on-year, surprisingly positive at 2%.

On the top line, 69% of companies are exceeding sales estimates. Overall revenue growth is +16% year-over-year. All sectors excluding utilities are experiencing positive revenue growth.

The combined EPS for Q3 2021 of the S&P 500 has increased to US$50 (+29% year-on-year), compared to +14% year-on-year at the beginning of the year.

Another point worth noting, given market concerns about rising inflation, is that the S&P 500 is reporting its third-highest net margin since 2008 for the third quarter, exceeding both last year's net profit margin and the five-year average of 10.9%.

We believe that these trends in results do not in any way reflect concerns about a slowdown in economic growth, and that for the moment, higher inflation is being well absorbed.

Finally, we expect the third-quarter earnings season to support risk assets over the coming weeks and beyond. Buying market pullbacks has remained an effective strategy, and now that we are poised to surpass all-time highs, targets in the 4,800–5,000 range for the S&P 500 seem the most likely path.

Otherwise, financial conditions remain very accommodative and will continue to be so despite an expected adjustment in monetary policy. Inflationary forces are putting pressure on central banks to abandon ultra-accommodative policies, not only because inflation has risen uncomfortably above their targets, but also because inflation depresses real policy rates, making current monetary policy even more accommodative than the nominal policy rate suggests.

However, as long as real yields remain subdued, they should not exert further pressure on market valuations, which in any case remain quite favorable in relative terms with regard to interest rate levels.

Humberto Mora

Strategy and Investments