US companies are sending an important signal in this earnings season: The rally in US stocks could extend beyond technology. For Bank of America there is a “turning point” in the results of this reporting period.
It is important to highlight that cyclical companies, whose performance is closely linked to the evolution of the economy, had a wide representation among the firms that reported their results. If this group’s earnings start to improve, it would be a positive sign for worried investors. for the dominance of technology stocks in a market that has recorded one record after another this year.
This broader growth becomes crucial to the progress of the rally now that large-cap technology companies are projected to show slower earnings growth, on average. The results of these giants will begin to arrive after the close on Tuesday, when Alphabet Inc.. present your report.
“We think third-quarter earnings for many cyclical companies represent a trough,” said Joe Gilbert, portfolio manager at Integrity Asset Management, quoted by Bloomberg.
“This does not mean, however, that earnings estimates are set to rise, but it does give us confidence that the environment is not going to get worse.” It has been a difficult period for cyclical sectors, which have grappled with weak demand and higher inventories after the Federal Reserve raised interest rates to the highest level in decades to curb inflation. With the easing of monetary policy and an economy in good shape, the outlook for these companies is improving.
What Bank of America said
“Businesses have been operating in a weak demand environment for nearly two years due to weakness in goods and manufacturing,” Bank of America strategists wrote in an Oct. 28 report. “But we see signs that the worst may be behind us.”
For next year, they wrote, “we expect a healthy recovery in volume in the manufacturing and goods sectors, which have been pressured by high rates, which should translate into an upside” in earnings per share.
It is worth remembering that US manufacturing activity contracted in September for the sixth month, reflecting weak orders and a decline in employment. However, on a more encouraging note, a Dallas Fed manufacturing survey suggests that the October ISM index is likely to rise, according to Bloomberg Economics’ Chris Collins.
The third-quarter earnings season for the industrial and materials sectors has so far shown year-over-year declines, with the number of companies reporting lower-than-expected results reaching the highest level since 2017, according to Wendy Soong, strategy analyst at equities at Bloomberg Intelligence.
However, there are risks to cyclical sectors, such as uncertainty surrounding the US presidential election and doubts about the pace of China’s economic recovery.
Source: Ambito
