Corporate earnings are on fire.
Basically, all the companies in the S&P 500 Index have reported earnings by now. And the results are impressive.
Earnings growth is at 25%.
That’s the highest earnings growth since the third quarter of 2010.
And as I mentioned last week, just because something is doing great now doesn’t mean it is going to start doing poorly soon.
The good times can last, and I still expect earnings to continue their robust growth well into 2019.
But this third-quarter earnings season is set to have a surprise in store. I want to highlight that today so you are prepared for what is to come.
Let me explain…
Real Earnings Growth
It’s true: Earnings look great.
It’s hard to argue they don’t when companies in the S&P 500 are posting their best earnings growth in almost a decade.
On top of that, 80% of the companies have reported earnings that were ahead of already elevated expectations.
This was somewhat expected.
Corporations are still benefiting from tax cuts, which are boosting their bottom line.
But 72% of companies in the S&P 500 have reported revenue numbers that topped analyst expectations.
This takes the results beyond corporate tax cuts, and into the health of our economy.
Companies can do many accounting gimmicks to alter their bottom-line results. But top-line results, or revenues, are real numbers. They’re sales. And it’s hard to manipulate these numbers.
Strong revenue growth shows that the results are real, and it’s a key reason we can expect solid earnings to continue.
With all that said, the third quarter could be tricky. I expect to see a pullback in the market.
Prepare for a Wild Third Quarter
I know that seems like it is in a sharp contrast to my bullish view. But a short-term pullback shouldn’t alter the longer-term prospects for the market — and that’s where my bullish view is intact.
The reason I’m looking for a pullback over this upcoming earning season comes directly from the latest, phenomenal earnings results.
See, while companies were posting their best growth since 2010, they also lowered guidance, for the third quarter or the rest of the year, by more than average.
Normally I wouldn’t pay much attention to this.
After all, it was a robust quarter, so cooling off analyst expectations for the rest of the year is perfectly fine.
But analysts didn’t take the bait.
Instead, they lowered expectations by less than average.
So, we have companies lowering guidance, but analysts not adjusting accordingly.
This is setting up for a wild third quarter, where more companies are likely to underperform analyst expectations.
This causes the initial reactions we see in stocks — not a long-term lasting effect.
But it will create volatility. And that volatility is going to be your opportunity.
Buy the Dip
Your opportunity is going to be buying the dip on this volatility.
The coming dip will happen just because analysts are being stubborn about moving their expectations. So you know a dip won’t be a sign of a greater concern.
I also want to point out that selling today would be too early.
The market is in rally mode right now. The S&P 500 just got back up to a new all-time high recently.
So, we’ll look for stocks to shoot higher over the coming weeks before we get into the middle of earnings season, around mid-October.
Then volatility will pick up, and we’ll see a modest pullback in the S&P 500.
Just don’t let it spook you.
Use it as an opportunity to buy the dip.
Chad Shoop, CMT
Editor, Automatic Profits Alert