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LPL Financial: 'Better Times Lie Ahead For Corporate Earnings Growth'

Shanthi Rexaline

The third-quarter reporting season has kickstarted, with the big banks turning in mixed results. 

Notwithstanding muted expectations for the quarter, an analyst at LPL Financial is hopeful about the future.

Little To Cheer In Q3 

The third-quarter earnings season does not hold much promise, with S&P 500 earnings unlikely to have shown much growth, John Lynch, LPL's chief investment strategist said in a Monday report.

The opportunity for upside surprise is also limited given the U.S.-China trade uncertainty, he said. 

Lynch sees the slower economic growth in the U.S. as well as in global economies hurting revenues, and tariffs and supply chain disruptions hurting profit margins.

Additionally, corporations are shying away from the investment needed to drive productivity growth, as trade uncertainty is denting confidence, Lynch said. 

Low Bar Could Be Cleared

The domestic economy has weakness written all over it, according to LPL.

Manufacturing activity has contracted, and services sector activity has slowed considerably despite a strong job market, Lynch said, citing recent surveys by the Institute For Supply Management.

"That trend suggests the S&P 500 may be able to beat fairly low expectations."  

With revenue growth historically correlated to GDP, the consensus revenue growth estimate of just under 3% for S&P 500 companies could be achieved, as GDP including inflation has grown at a 4% rate over the past year, the strategist said. 

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On a sector basis, the 19% drop in oil prices is expected to drag profits of oil companies by 40%, LPL said, citing estimates by FactSet.

The flat yield curve could hit bank profits, while technology stocks are also expected to see weakness spearheaded by semiconductor companies, according to LPL. 

Upcoming Quarters Offer Promise

Despite corporate profit growth grinding to a halt, better times lie ahead, Lynch said. 

"While tariffs and ongoing trade uncertainty could delay improvement, we remain optimistic that some progress on trade will be forthcoming and earnings growth could pick up over the coming quarters." 

LPL projects S&P 500 earnings will increase from $165 per share in 2019 to $175 per share in 2020.

The firm's for the index itself is a level of 3,000 at the end of 2019 and a range of 3,150 to 3,200 at the end of 2020. 

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