As the third quarter of the fiscal year unfolds, investors are on high alert for potential earnings reports that could lead to significant drops in stock prices. The atmosphere on Wall Street has grown increasingly cautious, with analysts consistently revising down growth expectations for companies in the S&P 500 index. This article delves into the recent trends in earnings estimates and highlights specific companies that investors should monitor closely as the earnings season progresses.
In recent months, Wall Street has witnessed a continual reduction in projected earnings growth for the third quarter, a trend not entirely unfamiliar to investors. According to a FactSet report, S&P 500 companies are now anticipated to report a mere 4.2% increase in earnings compared to the same period last year, a significant drop from the 7.8% expectation set on June 30. This pattern of downward revisions often occurs as the quarter progresses, revealing the sometimes pessimistic nature of forecasting in the financial markets.
Additionally, approximately 10% of S&P 500 companies have reported their results, revealing an encouraging trend: over 79% of these companies have surpassed their earnings forecasts. Although this could point to resilience in corporate performance, the substantial cuts to earnings estimates for several companies indicate that further disappointments may lie ahead, affecting overall investor sentiment significantly.
Investors keen on navigating this earnings season must remain vigilant, especially towards companies exhibiting signs of substantial downward revisions in their earnings forecasts. By employing comprehensive screening, as CNBC Pro has done, investors can pinpoint stocks that have recently experienced cuts of at least 10% in their earnings estimates over the last three to six months. This process serves as a crucial tool for identifying potential pitfalls ahead of earnings announcements.
One notable company in this observational net is Valero Energy, which is expected to release its quarterly figures on October 24. The outlook for Valero has become particularly bleak, with analysts slashing their earnings per share estimates by an alarming 80.3% over the past three months and by 85% over the prior six months. Despite this stark decline in anticipated performance, the stock is still favored by around 60% of Wall Street analysts. Analyst Joe Laetsch from Morgan Stanley holds an “overweight” rating on Valero, projecting a price target of $165 which suggests a potential upside of 22.5%. Laetsch notes the refinery’s advantageous position amid a tightening market, hinting that operational efficiency may continue to drive free cash flow for the company.
Another company facing uncertainty is Enphase Energy, which has also made its way onto investor radars. Analysts have reduced their earnings per share estimates for Enphase by almost 39% in the last three months and by 35.5% in the previous half-year. With only about half of the analysts rating the stock as a “buy,” concerns about future growth loom large. Christopher Dendrinos from RBC Capital Markets recently downgraded Enphase to “sector perform” from “outperform,” reducing his price target by $25 to $100. He cites potential sluggishness in the residential solar sector as a contributing factor to the company’s challenges, particularly the increasing popularity of third-party ownership energy systems, which could inhibit Enphase’s market share expansion.
Tesla is set to release its earnings report on October 23, and the stakes are high for the electric vehicle manufacturer. The company faces heavy scrutiny following disappointing delivery numbers and a lackluster reception of its recently announced robotaxi plans. Analysts have trimmed their earnings per share estimates for Tesla by a staggering 24.1% in the last three months and a notable 30.8% over the preceding six months. Consequently, only 34.5% of professionals regard the automaker as a “buy,” with Wells Fargo extending its bearish sentiment by reiterating an “underweight” rating in anticipation of a potential earnings miss.
As the earnings season approaches, caution is advised for investors looking to navigate potential disappointments. The expected declines in earnings growth and the ongoing adjustments to forecasts signal a landscape marked by uncertainty. Companies like Valero Energy and Enphase Energy exemplify the risks tied to core industries experiencing swift changes in demand and performance. With stocks like Tesla under scrutiny, the earnings reports in the upcoming weeks will likely either reinforce concerns or provide unexpected upside, reminding investors that staying informed and strategic is essential in the ever-evolving market landscape.