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Earnings Watch: Wall Street’s Q3 expectations have been all over the place. Now, a swing to profit growth is ‘likely’ — with a bigger rebound next year

Wall Street spent much of this year getting more tepid on third-quarter corporate profits, with expectations for subdued growth giving way to expectations for a slight decline.

But after results from a handful of companies soundly beat estimates in recent days, one analyst who tracks the ebbs and flows of earnings data says at least a slight profit gain for the quarter is more likely — with potentially double-digit percentage growth next year.

FactSet Senior Earnings Analyst John Butters, in a report out Friday, said that of the 32 companies in the S&P 500 Index SPX that reported third-quarter results through Friday, 84% have reported per-share profits that were above Wall Street’s expectations, and he said they were beating those expectations by a greater degree than usual.

The index collectively, so far, was putting up a third-quarter earnings growth rate of 0.4% — compared to estimates on Oct. 6 for a 0.3% decline. Most companies, he said, tend to turn in earnings results that beat estimates.

“Based on the average improvement in the earnings growth rate during the earnings season, the index will likely report year-over-year growth in earnings or more than 0.4% for Q3,” he said.

That assessment follows quarterly results from big companies like JPMorgan Chase & Co. and Delta Air Lines, Inc.. Both the bank and the airline reported better-than-expected profits. JPMorgan JPM, +1.50% Chief Executive Jamie Dimon said U.S. consumers and businesses “generally remain healthy,” despite thinning pandemic-era savings, while Delta DAL, -2.99% pointed to enduring “robust” travel demand.

More broadly, the quarter will be a look at how customers are faring amid still-high prices, an approaching holiday season and borrowing costs that could stay higher for longer. Recession pessimism has shown signs of easing. But Citigroup Inc.’s chief financial officer, Mark Mason, said on Friday that the bank expected a soft economic landing with a “mild recession” in the first half of 2024. However, he said such an outcome was “hard to call,” amid a strong job market.

Financial forecasts tend to fluctuate as analysts digest real-life financial data. For now, they expect S&P 500 index earnings growth of 7.6% for the fourth quarter, and 0.9% for 2023 overall, according to FactSet. Next year, at the moment, looks better, with expected earnings growth of 12.2%.

This week in earnings

More names from the financial sector will report in the week ahead, following results from JPMorgan, Citigroup C, -0.24% and Wells Fargo & Co. WFC, +3.07%. Reports from Morgan Stanley MS, -0.03% and Goldman Sachs Group Inc. GS, -0.18% will offer more context on deal-making and market sentiment, while earnings from credit-card giants Discover Financial Services DFS, -1.47% and American Express AXP, -0.12% will get more granular on customer spending.

More airlines, like United Airlines Holdings Inc. UAL, -2.76% and American Airlines Group Inc. AAL, -2.82%, will also report, providing more detail on whether revenge travel still has any life left. Earnings are also due from Johnson & Johnson JNJ, +0.33% and AT&T Inc. T, -0.62%.

In total 55 S&P 500 companies total will report quarterly results this week, including five from the Dow, according to FactSet.

The call to put on your calendar

Has Netflix become a utility? Hollywood’s writers will start returning to work, while talks with actors and studios have stalled. But the TV-and-film production limbo hasn’t been the only headache for streaming platform Netflix Inc., which reports quarterly results on Wednesday. The company will report amid greater pressure to boost profits, as the entertainment industry tries to find its footing in the streaming era. Ahead of the results, Wolfe Research analyst Peter Supino recently expressed concern that Netflix’s NFLX, -1.53% ad-supported plan was slow to catch on with viewers. Bernstein analysts likened the company to a mature, durable “utility.” But they also compared the stock to a long-running TV show that, while still good, might be starting to bore its audience. Executives will be hoping for better a better reception from investors.

The number to watch

Tesla margins: When EV maker Tesla Inc. reports results on Wednesday, it will be “all about margins,” Deepwater Asset Management’s Gene Munster said in note recently. Those results, and the focus on margins, will follow price cuts, and questions over profit growth and enthusiasm for Tesla’s TSLA, -2.99% new Cybertruck. And Morgan Stanley analyst Adam Jonas, in a research note, said the year ahead could be “volatile.”

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