What the Street expects this earnings season — and the headwinds we're monitoring

Published Wed, Oct 11 20236:01 AM EDT

The third-quarter earnings season unofficially kicks off this week, and the Street is expecting a modest return to growth after the disappointing first half of 2023. Overall, profits at S & P 500 companies are estimated to rise 1.3% from a year ago. That's not a terribly strong number, but — should it materialize — is a whole lot better than the 0.1% gain and 2.8% contraction in the first and second quarters, respectively. Revenues are pegged to increase 0.9% over last year. The implication of these two estimates is that analysts expect margin expansion, as companies cut costs to drop a greater portion of their top lines to the bottom lines. Analysts are also forecasting growth in 7 of the 11 S & P 500 sectors: Communication Services: 33.8% Consumer Discretionary: 21.1% Utilities: 12.5% Financials: 11.3% Technology: 6% Industrials: 5.3% Consumer Staples: 1.2% Real Estate: -7.3% Health Care: -10% Materials: -20.5% Energy: -34.7% For the fourth quarter, the Street is currently looking for earnings growth of 10.8%, higher than the 9.5% estimated back in July. Energy prices are a major watch item across all industries, after crude prices surged 29% in third quarter. Elevated oil prices are obviously good for those in the energy complex, but bad for just about every other industry as it represents a large and unavoidable input cost. With the ongoing war in Ukraine and the Hamas-Israel war in its early days, commentary on how companies are dealing with elevated energy costs will be crucial to earnings revisions beyond the third quarter. Fortunately, we have seen prices come down as of late. However, Mideast tensions are the highest we've seen in a long time, so uncertainty on the future path of oil prices will no doubt get baked into forward financial forecasts. The other big headwind is the strength of the U.S. dollar. This can impact earnings in one of two ways. First, there is a "translational" effect, when the reported numbers are hurt simply by the translation of foreign currency into dollars. This can often be adjusted for and is largely overlooked by analysts as it does not speak to demand dynamics. For example, any adjustments to asset prices may reverse in the future or a company could always choose to keep the foreign currency abroad until a better opportunity to convert it into dollars arises. The second and more concerning impact is what it can do to foreign demand for American goods. As the dollar strengthens, it can make products and services sold abroad less affordable as the currency abroad becomes less valuable. In July, it cost 893 euros to buy a $1,000 product; today it costs 943 euros. Club name Wells Fargo (WFC) is among the banks reporting Friday. In addition to high-level commentary on the state of the economy and consumer savings levels and spending habits, we'll be listening closely for an update on the bank's commercial real estate exposure and the impact higher rates have had on deposits and lending activity. We don't own JPMorgan Chase (JPM), but will want to hear what CEO Jamie Dimon has to about the economy on his own conference call, which will also take place on Friday. Our other Club bank, Morgan Stanley (MS), is set to report on Oct. 18. Assuming the turmoil in the Mideast doesn't expand beyond Israel's borders, the market action will be driven by earnings in the weeks to come. The reported results are always important, but stocks move on future expectations. Therefore, it's management commentary that will tell us how the price action into year end is likely to look. With uncertainty high and input cost dynamics in flux, management commentary will be key and cash on the sidelines will be valuable. We will provide additional thoughts on the coming earnings season during our October Monthly Meeting on Wednesday at noon ET. — with reporting from CNBC's Robert Hum (See here for a full list of the stocks in Jim Cramer's Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A pedestrian passes a Wall Street subway station near the New York Stock Exchange (NYSE) in New York, U.S., on Monday, June 27, 2022.

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The third-quarter earnings season unofficially kicks off this week, and the Street is expecting a modest return to growth after the disappointing first half of 2023.