Earnings have been mostly good. Just avoid the tech wreck
What’s more, demand still seems to be holding up for many companies.
New York (CNN Business) Stocks have rallied sharply in October , despite continued worries about rampant inflation globally, a strong dollar hurting multinational companies and the political and economic turmoil in the UK . A lot of the optimism has to do with the fact that investors are hoping the Federal Reserve will soon start to slow its pace of interest rate hikes.But there’s another reason. Corporate earnings have actually been, to quote “Curb Your Enthusiasm’s” Larry David, pretty, pretty good. Just steer clear of the once red-hot tech sector.All four stocks tumbled Wednesday. And that’s a big reason why the Nasdaq was flat in late morning trading, even as the broader market held up relatively well. The Dow was up more than 300 points, or 1%, while the S&P 500 gained 0.6%.Top techs (i.e. what used to be dubbed FAANG stocks before name and ticker changes) make up a big chunk of the weighting of the S&P 500. Investors are now waiting to hear from the likes of Facebook owner Meta Platforms , which reports earnings after the closing bell Wednesday, andand, which report Thursday afternoon.Weakness in tech is dragging down profit forecasts for the broader market. According to data from FactSet senior earnings analyst John Butters provided to CNN Business Wednesday morning, analysts are now forecasting profit growth of just 0.6% in the third quarter for the S&P 500. That’s down from estimates of 1.5% as recently as Friday.
Wall Street is predicting that profits will drop for both the tech and communications services sectors.
“I still don’t love tech. There are not a lot of values there. These companies aren’t growing to the sky anymore,” said Brian Frank, chief investment officer of Frank Funds.
More to the market than FAANG
Look beyond tech though and there are many more bright spots to be found in Corporate America’s report cards.
There are many parts of the economy that are still doing fine. Along those lines, FactSet’s data shows that analysts are expecting double-digit percentage growth in earnings for consumer discretionary companies , industrials and real estate firms. And energy sector profits are forecast to more than double, thanks to the surge in oil prices this year.Two other encouraging signs? Nearly three-quarters of the S&P 500 companies that have reported earnings so far have topped forecasts. (The earnings misses, naturally, get more attention on Wall Street.)What’s more, demand still seems to be holding up for many companies . Revenue is expected to grow 8.6% in the quarter, according to FactSet. So the weaker earnings are more a function of higher costs as opposed to a significant slowdown in sales.
“Overall, earnings are doing well given the environment,” said Max Wasserman, senior portfolio manager with Miramar Capital.
Wasserman said he’s hoping that inflation pressures might finally be close to peaking…and as pressure on expenses starts to fade, that should boost earnings .”We’re not out of the woods yet, but we can see the bottom,” he said. “I’m optimistic because what hurt companies on the way down should help them on the way back up.”