Q3 Earnings Season Poses Next Big Test for S&P 500: Here's How to Prepare for It

Get ready for more volatility; the next major test for the stock market is upon us.

Wall Street's third quarter earnings season unofficially begins on Friday, October 13, when notable names like JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), and UnitedHealth (NYSE:UNH) all report their latest financial results.

The following week sees high-profile companies like Tesla (NASDAQ:TSLA), Netflix (NASDAQ:NFLX), Bank of America, Goldman Sachs, Morgan Stanley, Charles Schwab (NYSE:SCHW), American Express (NYSE:AXP), Procter & Gamble, Johnson & Johnson, AT&T, American Airlines (NASDAQ:AAL), and United Airlines report earnings.

The earnings season gathers momentum in the final week of the month when the mega-cap tech companies are scheduled to deliver their Q3 updates. Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) are both due on Tuesday, October 24, followed by Meta Platforms (NASDAQ:META) on Wednesday, October 25, and Amazon (NASDAQ:AMZN) on Thursday, October 26. Apple (NASDAQ:AAPL) will be the final ‘FAAMG’ stock to report results on Thursday, November 2.

Investors are bracing for what may be another rocky reporting season amid the negative impact of several macroeconomic headwinds.

After earnings per share for the S&P 500 fell 4.1% in Q2 2023, earnings are expected to drop 0.3% in Q3 when compared to the same period last year, according to FactSet estimates.

FactSet Q3 EPS Growth Forecast

Source: FactSet

If 0.3% is the actual decline for the quarter, it will mark the fourth consecutive quarter of year-over-year earnings declines reported by the index. However, it would be the smallest decline during this four-quarter streak.

The Communication Services sector, which includes names like Google-parent Alphabet (NASDAQ:GOOGL), Facebook owner Meta Platforms (NASDAQ:META), Netflix (NASDAQ:NFLX), and Walt Disney (NYSE:DIS), is expected to report the largest third-quarter earnings gain, at 31.5%.

The Consumer Discretionary sector is expected to come in second, with 22% annualized earnings growth. The space includes notable companies such as Amazon (NASDAQ:AMZN), Walmart (NYSE:WMT), Home Depot (NYSE:HD), McDonald’s (NYSE:MCD)s, and Coca-Cola (NYSE:KO).

For bank results, where earnings are forecast to grow 8.7%, FactSet says to expect weak loan growth, especially mortgages, and rising loan-loss provisions, offset by “draconian cost-control programs,” which could help the sector step over a low bar on earnings.

On the other hand, energy company earnings are expected to fall 37.7% compared to last year - the worst drop of any sector by far. Lower year-over-year oil prices are contributing to the decrease in earnings for the sector. Despite the recent rally, the average price of oil in Q3 2023 ($82.22) was still 10% below the average price in Q3 2022 ($91.43).

Meanwhile, revenue expectations are slightly more positive, with sales growth expected to increase 1.7% from the same quarter a year earlier. If that is in fact the reality, FactSet pointed out that it would mark the 11th straight quarter of revenue growth for the index.

FactSet Q3 Revenue Growth Forecast

Source: FactSet

Nine sectors are projected to report year-over-year growth in revenues, led by the Consumer Discretionary sector, at 7%. In contrast, two sectors are predicted to report a y-o-y decline in revenues: Energy and Materials.

Guidance

Beyond the top-and-bottom-line numbers, investors will pay close attention to announcements on forward guidance for the rest of the year and early 2024, given the uncertain macroeconomic outlook, which has seen recession fears mount lately.

Other key issues likely to come up will be the health of the U.S. consumer, future hiring plans, as well as lingering supply chain concerns.

Another key concern for investors is the impact of a rallying U.S. dollar on overseas revenue. A strong greenback can hurt U.S. companies that sell goods abroad by making those products less affordable.

More than a quarter of the companies in the S&P 500 earn a majority of their revenue outside the U.S., as per FactSet.

Meanwhile, in the tech sector, artificial intelligence is likely to be a big theme again. Investors will look to see if companies can turn optimism over AI developments into an improved bottom line.

What to Do Now?

Markets are heading into the Q3 reporting season on a wobbly note amid worries over rising interest rates and the likelihood that the Federal Reserve could keep rates high for longer.

The benchmark S&P 500 is down roughly 6% from its late-July highs, cutting its year-to-date gain to 12%. The pullback has wiped out most of the blue-chip Dow Jones Industrial Average’s 2023 gains.

S&P 500 Daily Chart

Amid the current backdrop, I used the InvestingPro stock screener to search for companies that are poised to deliver annualized growth of at least 25% or more in both profit and sales as the third quarter earnings season kicks off.

InvestingPro Stock Screener

Source: InvestingPro

InvestingPro's stock screener is a powerful tool that can assist investors in identifying high quality stocks with strong potential upside. By utilizing this tool, investors can filter through a vast universe of stocks based on specific criteria and parameters.

Some of the notable tech-related names to make the list include Nvidia (NASDAQ:NVDA), Arista Networks (NYSE:ANET), Snowflake (NYSE:SNOW), CrowdStrike (NASDAQ:CRWD), MongoDB (NASDAQ:MDB), Zscaler (NASDAQ:ZS), and Cloudflare (NYSE:NET).

Meanwhile, JPMorgan Chase (NYSE:JPM), Royal Caribbean (NYSE:RCL), Las Vegas Sands (NYSE:LVS), and DoorDash (NASDAQ:DASH) are a few consumer-sensitive stocks to watch out for that are also projected to deliver upbeat Q3 earnings and revenue growth.

InvestingPro Screener

For the full list of the 18 stocks that met my criteria, start your free 7-day trial with InvestingPro to unlock must-have insights and data!

If you're already an InvestingPro subscriber, you can view my selections here.

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Disclosure: At the time of writing, I am short on the S&P 500, Nasdaq 100, and Russell 2000 via the ProShares Short S&P 500 ETF (SH), ProShares Short QQQ ETF (PSQ), and ProShares Short Russell 2000 ETF (RWM).

Additionally, I have a long position on the Energy Select Sector SPDR ETF (NYSE:XLE) and the Health Care Select Sector SPDR ETF (NYSE:XLV). I regularly rebalance my portfolio of individual stocks and ETFs based on ongoing risk assessment of both the macroeconomic environment and companies' financials.

The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.