Wall Street's Renewed Confidence: A Positive Outlook for Corporate Profits

A Shift in Sentiment

Wall Street is raising quarterly profit forecasts for the first time in two years. After nearly two years of concerns about a recession, growing optimism about the economy is starting to filter down into Wall Street’s expectations for individual companies’ quarterly results, with analysts growing more upbeat about corporate profit in the months ahead.

Analysts' Positive Trend

While expectations for those quarterly results usually trend lower as earnings season arrives, analysts over the past two months have actually nudged their profit forecasts higher for the first time in two years, according to a FactSet report released Friday.

A Significant Upturn

"In fact, this quarter marked the first increase in the bottom-up EPS estimate over the first two months of a quarter since Q3 2021," FactSet Senior Earnings Analyst John Butters said in the report.

Upward Movement in Estimates

Estimates for third-quarter earnings per share rose by 0.4% from June 30 to Aug. 31, he said. Fourth-quarter estimates also increased by 0.6% over that period.

Federal Reserve's Stance

Those estimates for companies tend to fall as their earnings dates approach, as optimistic projections fade and financial realities set in, but the Federal Reserve recently said it now expects a “noticeable slowdown” rather than a recession. And some analysts said that the August jobs report was precisely what the Fed needed to end its rounds of interest-rate hikes which it has relied on to weaken consumer borrowing and spending power and lower inflation.

A Decline in Recession Talk

The FactSet report also found that executives are talking less frequently about a recession, based on an analysis of earnings call transcripts. From June 15 through Aug. 31, that analysis found, "the number of S&P 500 companies citing ‘recession’ on earnings calls has declined for four straight quarters."

The Market's Response

Investors have been closely monitoring this shift in sentiment. The stock market has responded positively to the rising profit forecasts. Major indices like the S&P 500 and the Dow Jones Industrial Average have seen steady gains in recent weeks. This renewed optimism has led to increased investment and buying activity from both institutional and retail investors.

Impact on the Bond Market

The shift in Wall Street's sentiment hasn't been limited to stocks. The bond market has also experienced changes. With the Federal Reserve's stance on interest rates, bond yields have started to stabilize. Fixed-income investors are reassessing their portfolios, looking for opportunities in bonds that offer better returns without taking on excessive risk.

Economic Indicators

The Labor Market

One key factor influencing Wall Street's newfound optimism is the state of the labor market. The August jobs report showed substantial job growth, with unemployment rates falling to pre-pandemic levels. This improvement suggests that consumer spending, a crucial driver of corporate profits, is likely to remain strong in the coming months.

Inflation Dynamics

Inflation, which has been a source of concern, is also being closely watched. While prices have risen in various sectors, the Federal Reserve's prediction of a "noticeable slowdown" in economic activity has eased inflation fears to some extent. Companies are adapting to the changing price environment, and some have even implemented targeted price cuts to remain competitive.

Expert Opinions

Differing Views

Despite the positive trend in profit forecasts, there are differing opinions among experts. JPMorgan analysts recently stated that the collective corporate profit outlook for 2024 was “too optimistic.” They pointed to potential headwinds, including global economic uncertainties and geopolitical tensions.

Recession Expectations

More bearish analysts have pushed out their recession expectations to next year. They argue that while the current economic landscape appears promising, unforeseen events could lead to a downturn. As a result, investors are urged to maintain a diversified portfolio that can weather potential economic challenges.

This Week in Earnings

Limited Earnings Reports

Looking ahead, the upcoming week has only two S&P 500 companies set to report quarterly results, according to FactSet. The companies reporting results this week include e-signature platform Docusign Inc., Smith & Wesson Brands Inc., C3.ai Inc., and Gitlab Inc.

Key Earnings Insights

Analysts will be closely watching these earnings reports for insights into various sectors of the economy. These reports can provide valuable information about consumer behavior, trends in technology adoption, and the impact of inflation on different industries.

Kroger's Impact on Inflation

A Challenging Landscape

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.

A Complex Situation

Kroger's position in the market is a reflection of the complex economic forces at play. As consumers grapple with rising prices and economic uncertainty, grocery chains like Kroger must navigate a delicate balance between maintaining profitability and addressing the needs of their customers.

GameStop's Market Share

Changing Fortunes

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.”

The Ongoing GameStop Saga

The GameStop saga continues to captivate both investors and the public. The company's strategic shifts and leadership changes have kept analysts on their toes. While GameStop faces challenges in retaining market share, it also holds substantial cash reserves, which could be used to explore new growth opportunities in the gaming industry.