Wall Street is raising quarterly profit forecasts for the first time in two years

By Bill Peters

Earnings Watch: Results from Kroger will put the lens on grocery prices, while GameStop reports following C-suite shakeup

After nearly two years of concerns about a recession, growing optimism about the economy is starting to filter down into Wall Street's expectations for individual companies' quarterly results, with analysts growing more upbeat about corporate profit in the months ahead

While expectations for those quarterly results usually trend lower as earnings season arrives, analysts over the past two months have actually nudged their profit forecasts higher for the first time in two years, according to a FactSet report released Friday.

Holdouts against that optimism aren't hard to find, but during July and August, Wall Street analysts increased their third-quarter earnings per share estimates for the 500 companies in the S&P 500 Index SPX, the report said.

"In fact, this quarter marked the first increase in the bottom-up EPS estimate over the first two months of a quarter since Q3 2021," FactSet Senior Earnings Analyst John Butters said in the report.

Estimates for third-quarter earnings per share rose by 0.4% from June 30 to Aug. 31, he said. Fourth-quarter estimates also increased by 0.6% over that period.

Those estimates for companies tend to fall as their earnings dates approach, as optimistic projections fade and financial realities set in, but the Federal Reserve recently said it now expects a "noticeable slowdown" rather than a recession. And some analysts said that the August jobs report was precisely what the Fed needed to end its rounds of interest-rate hikes which it has relied on to weaken consumer borrowing and spending power and lower inflation.

The FactSet report also found that executives are talking less frequently about a recession, based on an analysis of earnings call transcripts. From June 15through Aug. 31, that analysis found, "the number of S&P 500 companies citing 'recession' on earnings calls has declined for four straight quarters."

Still, JPMorgan analysts recently said the collective corporate profit outlook for 2024 was "too optimistic." And more bearish analysts have pushed out their recession expectations to next year.

This week in earnings

Only two S&P 500 companies are set to report quarterly results in the week ahead, according to FactSet. The companies reporting results this week include e-signature platform Docusign Inc. (DOCU), Smith & Wesson Brands Inc. (SWBI), C3.ai Inc. (AI) and Gitlab Inc. (GTLB).

The call to put on your calendar

Questions for Kroger on 'disinflation,' consolidation: Grocery-store chain Kroger Co. reports results on Friday. The results, as they have been over the past year, will put the spotlight on the ebbs and flows of inflation. Price increases have squeezed consumers, while helping profits for food producers and grocery stores. Kroger (KR), in June, said it had made "targeted" price cuts to help customers hit harder by inflation -- helping it compete against other stores while threatening the bottom line. And while executives said that inflation had begun to ease, they said they believed that the spending backdrop "will remain challenged for our customers as they deal with higher interest rates and an uncertain economic outlook." Meanwhile, Kroger's merger deal with Albertsons Cos. Inc. (ACI) continues to draw concerns about higher prices, competition and consumer access.

The number to watch

GameStop results: GameStop Corp. didn't hold a conference call following its quarterly results in June. But the drama surrounding the video-game retailer and meme stock played out in other ways. GameStop in June fired its chief executive, and activist investor Ryan Cohen became executive chairman. In July, it announced the resignation of its chief financial officer, who left last month. Ahead of the company's second-quarter results, set for Wednesday, Wedbush analyst Michael Pachter cited hardware growth for Nintendo and Sony, and a "compelling" software slate, and noted the company's roughly $1.3 billion of net cash. But he said GameStop "appears to have lost market share in recent quarters."

-Bill Peters

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09-04-23 1130ET

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