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Q3 Earnings Likely To Continue Trend Of Modest Growth

Corporate earnings won't be spectacular in the third quarter, but growth could end up being the best in more than a year as a slowly improving economy generates broader gains.

S&P 500 companies should deliver a 4.7% profit gain, according to analysts polled by Thomson Reuters. That would be the third straight quarter of modest deceleration. But most firms end up beating Wall Street forecasts, so the final tally will likely be somewhat higher, perhaps the best this year. In early July, Q2 earnings growth was projected at just 2.9%, but actually was 4.9%.

"I don't think you're going to see, per se, spectacular numbers, but I think the market already realizes that," said Matthew Kaufler, portfolio manager at Federated Clover Investment Advisors.

Top-line growth will remain sluggish, but revenue is expected to rise 3.1%, up from Q2's 2.2%.

Corporations are benefiting from easy comparisons. Q3 2012 profits rose just 0.1% and revenue fell 0.8%.

Profit growth this quarter also should be more broad-based as the U.S. economy shows slow but steady improvement. In Q2, big-bank earnings masked a 0.2% decline in the rest of the S&P 500. Ex financial earnings this quarter are seen rising 3.6%.

Financials are still expected to deliver the strongest growth, at 10%, said Gregory Harrison, a corporate earnings researcher at Thomson Reuters.

"A lot of the strength is coming from the big banks," he said. "They're benefiting from the housing market rebound to some extent.

Several big banks have forecast a big drop in mortgage activity in Q3 as interest rates rose on expectations that the Federal Reserve will curb bond purchases.

Consumer discretionary firms also should have solid results thanks to still-robust demand for big-ticket items such as housing and car-related products. Homebuilders can expect a 28% growth in earnings compared with Q3 2012. Auto dealers are expected to have a 24% jump in earnings. Automotive parts businesses can expect an 18% boost.

Industrials should report a 5.5% earnings gain. General Electric (GE) should report a 6% EPS advance after Q2's 6% drop. Tech earnings are expected to climb 3.2%, despite further declines from Apple (AAPL) and Intel (INTC).

Energy companies are expected to lag with a 0.7% drop, led by lower profits from giants Exxon Mobil (XOM) and Chevron (CVX). But many smaller, non-S&P 500 energy plays are booming along with domestic oil and gas production.

"The infrastructure side of energy can be rewarding from an investment perspective," Kaufler said.

Potential bumps in the road include the latest standoffs on Capitol Hill over government spending and the debt ceiling. Other concerns include Middle East instability, Europe's weak recovery and a slowdown in China's breakneck growth.

But if the status quo of slow but steady growth in the U.S. holds, conditions should look up for investors and the business community, Kaufler said.