Third quarter earnings season kicked off with a bang last week.
As they do every quarter, the big investment banks launched the reporting season for quarterly financial results.
JPMorgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) both reported results last Friday, and the market was watching closely for an update on the health of both consumers and businesses.
Those big money center banks – together with rivals like Citigroup (NYSE: C) and Bank of America (NYSE: BAC) – are major pipelines for money moving through the economy. As such, they can provide bountiful information about both borrowing and spending (two activities that are vital to economic growth).
And while loan demand remained weak in the third quarter – mostly due to elevated interest rates engineered by the Federal Reserve since early 2022 – consumer finances and spending continue to be healthy, despite the higher inflation of the last few years. With consumer spending driving roughly two-thirds of economic activity, that’s a very good sign indeed… for both the economy and investors.
In fact, industry analysts were predicting worse earnings for the big banks due to the still-meager lending demand. But the banks have outperformed those expectations so far, and their earnings are expected to improve going forward as the Fed lowers interest rates and loan demand rebounds.
As a result, both JPMorgan’s and Wells Fargo’s stocks soared, recording their best daily performances since April 2023 and February 2024, respectively. The S&P 500 also rose on the news.
FactSet tracks both earnings estimates by equity analysts and actual earnings, and it predicts the S&P 500 will report earnings growth of about 7% this quarter (compared with the same quarter a year ago).
And as you can see in the chart below, S&P 500 overall earnings have been growing at an accelerating pace since the third quarter of 2023…
As Chief Investment Strategist Alexander Green periodically reminds us, a company’s earnings growth is the best indicator of where its stock price will go in the medium to long term. By extension, the aggregate earnings of an index are the best indicator of where the broader market (as measured by the S&P 500 in this case) will go in the medium to long term.
Much More to Come
Bottom line: If earnings continue to grow as they have been for the last four quarters, it’s a very good sign that the current two-year bull market can continue to climb.
(That’s assuming there isn’t a shock like a war involving the U.S. or a spike in oil prices, of course.)
And there’s much more to come. Smart investors will be watching the earnings of several bellwether companies over the next few weeks to get a more accurate measure of the health of consumers and businesses. These companies include airlines, manufacturers, automakers, restaurant chains, and mega tech companies closely linked to artificial intelligence.
So we should all continue to monitor corporate earnings. As they go, so go the prices of the stocks we own and the long-term health of our portfolios.