As the earnings season starts this week, Wall Street has set a modest bar for third-quarter results, according to Bank of America (BOFA, Financial). With expectations anchored low, companies that express optimism about the recent cut in interest rates stand to see their stocks rise.
Bank of America analysts have lower expectations for the quarter, predicting a modest 2% growth in earnings, which falls short of the consensus estimate of 4% and is a significant slowdown from the 11% growth observed in the second quarter. This dull outlook reflects the slowing macroeconomic environment and the mild earnings beat from the previous quarter, which have collectively lowered investor expectations for the current reporting period.
"The bar isn't high. As long as companies have managed through macro headwinds and see early signs of improvement from lower rates, stocks should get rewarded," Bank of America analysts noted in a recent Tuesday dispatch. They highlighted that the consensus estimates, which have seen earnings-per-share predictions cut by 4% for the quarter, already account for anticipated weaknesses, making a beat more likely in the context of lower interest rates.
The Federal Reserve's decision to cut interest rates by 50 basis points at the end of the third quarter has sparked optimism, propelling the S&P 500 to record highs as markets begin to price in the emerging interest-rate easing cycle. According to the analysts, lower rates are expected to catalyze a rebound in rate-sensitive sectors such as manufacturing and housing, which were notably impacted by the Fed's previous rate hikes. This expected uplift is seen as a potential boom for industries under strain, heralding a possible resurgence in the coming quarters.
