What’s up with earnings? The market has gone lower, but earnings estimates have not. Friday’s jobs report — and the subsequent 100-point rally in the S & P 500 (a 2.3% move from top to bottom) — has some investors convinced that the soft landing is not dead: inflation is moderating (wage growth was lower than expected) yet job growth remains strong. That’s a good setup for earnings season, which starts this week in an odd position: earnings estimates for the third and fourth quarter are slightly higher than when the third quarter began. Q3 S & P 500 earnings: trending higher July 1: $55.76 Today: $55.78 Source: LSEG Q4 S & P 500 earnings: trending higher July 1: $57.58 Today: $58.14 Source: LSEG The fact that the third quarter estimate of $55.78 is slightly below the third quarter of last year ($56.02) is not important: what matters is the trend in earnings. Is the trend up or down? In this case, it is modestly higher. This is a surprise for two reasons: 1) analysts normally cut estimates by 3%-5% as the quarter ends because they are usually overly optimistic, and 2) it is unusual for estimates to hold up so well after a brutal September with higher oil prices and higher interest rates. The stock market, which had a terrible month, seemed to be projecting a dramatically slower economy. What’s going on? Either the economy is a lot stronger than everyone thinks, or there are going to be some disappointing earnings reports in the next few weeks, particularly in technology. No big surge in earnings warnings You’d think if the consumer was in big trouble, corporate America would be frantically signaling that earnings are in trouble by pre-announcing earnings, but the early evidence does not indicate that. For Q3 2023, 76 S & P 500 companies have issued negative EPS guidance and 42 S & P 500 companies have issued positive EPS guidance, according to John Butters, senior earnings analyst at FactSet. That’s 118 companies that have given guidance for the third quarter. While that number is high, the companies issuing negative guidance compared to positive guidance isn’t. “The earnings outlook for the S & P 500 for the third quarter is less negative relative to recent quarters,” Butters told clients. “The percentage of companies issuing negative earnings guidance is equal to the 10-year average.” That is significant. Companies usually enter a “quiet period” before their earnings reports, where they make no comments to the public. This is typically three or four weeks before earnings come out. The bulk of earnings season will occur between October 23 and November 3. If companies were truly uncomfortable with earnings and thought analysts were way too optimistic, they would have typically sought to lower expectations by issuing some kind of guidance. Is there another explanation? Nick Raich at Earnings Scout said it was possible the chaos in September came on so suddenly that corporations were unsure what, if anything, was going on with their businesses and elected to remain silent, which would be another case of “analysts with deer caught in the headlines.” Early reporting companies didn’t ring alarms Twenty companies have already reported third quarter earnings. Big names like FedEx , Oracle , Lennar , AutoZone , Darden and Costco . Of those, 90% beat on earnings, 65% beat on revenues. That is very close to the average for those companies. Here’s what stands out: the average earnings growth was 10.6%. The average revenue growth was 4.2%. Both of those are high. Both are above last quarter and above the historic average. Watch Pepsi Those 20 companies all had quarters ending in August. Pepsi , which reports Tuesday morning, is the first company with a quarter that ends in September. It’s not been a great quarter for Pepsi, or for its rival Coca-Cola , or for consumer staples in general. Pepsi is down 11% on the year, Coca-Cola down 16%. Some of the weakness is likely due to pressure from cheaper private labels (Pepso owns Frito-Lay). Some of the decline last week is likely due to Wal-Mart’s comment that a recent dip in food purchases may be due to consumers taking weight loss drugs. Seems likely Pepsi will be asked about this on the earnings call. Another big problem is the strong dollar. Pepsi is one of the most globally diverse companies in the world: it gets more than 40% of its revenues outside the United States. Major markets include Mexico, Russia, Canada, China, the UK, South Africa and Japan. Unfortunately, this also means that the rise in the dollar (up about 6% since July) is a serious headwind for Pepsi. A higher dollar dilutes the value of foreign profits when they are converted into dollars. Put it all together, and little surprise Barclays and JPMorgan last week cut their price targets on Pepsi down to $179 and $188, respectively. Have analysts set the bar too high? Binky Chadha, chief U.S. equity and global strategist at Deutsche Bank, says the analysts have not messed up: “Has the consensus set the bar too high? In our reading, no,” he told clients on Friday. He noted that there have been smaller than expected cuts to two sectors: the all-important mega-cap growth and technology sectors, and energy. Other sectors have seen modest cuts inline with a typical 3% reduction in estimates. “This earnings season lands in the midst of what we see as a typical pullback and with positioning already underweight, suggest[ing] fertile ground for an above average rally, especially if the earnings recession narrative starts to abate,” he said.