Wall Street Week Ahead: U.S. earnings improvement expected, but still a weak quarter

By Caroline Valetkevitch
NEW YORK (Reuters) - While good economic news has been in short supply, investors can easily take comfort in the coming weeks with US corporate earnings that are likely bad but not as bad as they are now.
Analysts believe the S&P 500 profit is down 21% in the third quarter compared to the same quarter last year. This is a significant improvement over the 30.6% decline in the second quarter, which was most likely the bottom of earnings this year according to Coronavirus lockdowns, according to IBES data from Refinitiv.
Earnings reports are set to get rolling next week with results from some of the major US banks likely to be affected by near-record lows and the pandemic-induced recession. JPMorgan & Co. <JPM.N> and Citigroup <C.N> both release results on Tuesday.

(Graphic: The S&P 500's third quarter results look bad, but not as bad as the second quarter - https://graphics.reuters.com/USA-STOCKS/azgvoaoyzvd/chart.png)

Overall, the S&P 500 quarterly results tend to exceed analysts' cautious expectations, and they may do so even more than usual this reporting season, strategists said. In a departure from the typical trend, U.S. corporate forecasts have been positive rather than negative, and estimates have improved in recent weeks to reflect more optimistic projections.
Whether that's enough to prop up stocks in the coming weeks is up for debate.
"In the past 10 years, earnings estimates have increased very rarely after a quarterly reporting season," said Art Hogan, chief marketing strategist for National Securities in New York.
"That's a very good sign. It's a sign that there is a good chance this quarterly earnings season is now better than expected," he said. "The only problem is that after entering the fourth quarter, many economic indicators are plateauing."
That could weigh on the fourth quarter forecast and overshadow some of the better-than-expected results, he said.
U.S. unemployment claims data last Thursday was one of the most recent to underscore the view that the labor market recovery was having a hard time gaining momentum and coronavirus cases continued to rise.
Earnings season begins as the nation also prepares for the November 3rd US presidential election, which takes place in the middle of one of the toughest weeks of earnings reporting. This, coupled with a focus on the prospect of additional fiscal stimulus from Washington, could overshadow earnings news.
Companies that have reported on the quarter so far haven't seen much delight from investors despite their much stronger-than-expected results, some strategists have noted.
"Companies that reported the third quarter are already down 1% on average despite the big beats, suggesting the bar is much higher for investors," UBS strategist Keith Parker wrote in a note.
U.S. stocks saw strong gains in the third quarter but fell in September for the first monthly decline since March when the coronavirus began its rapid spread in the United States.
Among the sectors, profits from the S&P 500 energy sector <.SPNY> are likely to have declined the most, with a year-on-year decline of 115% forecast, according to Refinitiv.
The consumer discretionary <.SPLRCD>, which includes some of the companies hardest hit by coronavirus lockdowns, such as: In retail, travel and tourism, for example, profits are expected to decline 34% year over year.

(Graphic: Wall Street prepares for lower earnings - https://fingfx.thomsonreuters.com/gfx/mkt/qzjvqnrdxpx/Pasted%20image%201602175244692.png)

However, analysts expect earnings from the heavyweight sector of the S&P 500, Technology <.SPLRCT>, will decline only 0.5% year over year in the third quarter. This is the smallest decrease among all sectors.
"Granted, things are better than they were at the end of June," wrote Tobias Levkovich, Citi's chief US equity strategist.
Given the many uncertainties surrounding the pandemic, treatments, US elections, and the economy, "Moving forward will be critical and we suspect C-suites may remain guarded," he said.

(Reporting by Caroline Valetkevitch; Editing by Alden Bentley and Chris Reese)

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