In a year characterised by heightened political risks of all sorts, Sabre rattling with North Korea, investigations in Washington, and highly controversial demonstrations elsewhere, investors in the US stock market have taken their confidence from one primary factor, earnings growth.
Ignore the noise, they have said. Markets trade on so-called fundamentals, operating performance of companies, interest rates, and valuations. While stock market valuations have been high this year and interest rates are seen rising, earnings growth has been great. 13.9 percent and 10.3 percent respectively in the first and second quarters.
For the third quarter, however, consensus estimates point to growth of just 3.2% in earnings per share versus the same period a year ago, according to FactSet. Some of the drop off in growth is linked to more difficult comps in Wall Street parlance for energy companies and this was widely expected.
Earnings cratered in the early part of 2016 with the decline in the price of oil. That made it easy for companies to post big year on year improvements in the first half of 2017, but the impact of that shift becomes less significant as the year progresses, making for less dramatic increases in the sector's EPS.
Other factors are also at play. Financial companies are expected to produce the worst showing for the third quarter with profits forecasted to shrink by 5%. The biggest driver here comes from insurance where earnings projections are being dialled back based on expected losses after this year's punishing hurricane season.
EPS for insurance companies is expected to drop 40% versus the same quarter one year ago. In spite of this anticipated hickup in earnings growth, the S&P 500 made fresh highs on Thursday. As Nicholas Colas of the independent research firm, Data Track Research, points out, losses from what are viewed on Wall Street as extraneous time factors tend not to bother investors too much.
That should be the case this earnings season as well. Companies in affected sectors can easily dismiss a troublesome quarter by pointing to the hurricanes and investors are likely to be forgiving.