Finimize - 3️⃣ It's earnings time

What’s going on here?

The third quarter’s in the rear-view, and it won’t be long before companies lift the curtain on how they’ve done.

What does this mean?

Professional analysts forecast how much companies will earn each quarter. And this time, they seem to have set the bar comfortably low. They’ve lowered their profit forecasts for S&P 500 companies by almost 4% over the last three months, compared to an average historical cut of 3%. That said, analysts still predict that companies in the index will have made 5% more profit than the same time last year – the fifth quarter of growth in a row. Just like last quarter, the number-crunchers are particularly optimistic about communication services, healthcare, and information technology firms. But they’re not expecting much from materials, energy, and consumer discretionary firms, whose profits are forecasted to shrink.

Why should I care?

For markets: Too good to be true.

Investors are expecting rising company profits and profit margins, and falling interest rates without the US economy going into recession. If that turns out to be true, great. The challenge, however, is that history suggests it won’t be. See, interest rates are usually cut when the economy’s weak, and a weak economy makes for a drop in company profits. And in the last 40 years, there’s never been profit growth and falling US rates at the same time. So if earnings growth turns out as strong as investors think, chances are that further rate cuts won’t be as forthcoming as economists think.

For you personally: Your earnings season playbook.

Remember, short-term moves are common after earnings, but plenty of stocks will level out after all the excitement. So before you make any long-term decisions, assess why the company did better or worse than expected. Then scan through the latest data to see what’s next for the company, before updating your forecasts and valuation accordingly. If you’re still sweet on the stock, you might be onto a winner.

What’s going on here?

Tesla reported fewer third-quarter vehicle deliveries than expected and its stock initially dropped 5%.

What does this mean?

For the first time this year, Tesla grew the number of vehicles it delivered in a quarter compared to the previous year – but the EV giant still fell short of analysts’ forecasts by roughly 1,000 cars. To avoid posting its first-ever annual decline in deliveries, Tesla must deliver a record 516,344 vehicles by the year's end. And other challenges are mounting: Chinese competitors like BYD and Xpeng are ramping up production, bolstered by local government subsidies, while Tesla is grappling with reduced consumer spending in China and a lack of subsidies in Europe.

Why should I care?

The bigger picture: Buy the rumor, sell the fact.

Tesla delivers almost half a million cars each quarter, so a thousand here or there should be small fry – and, all else equal, shouldn’t lead to as big a drop in the stock as there initially was on Wednesday. It might be explained by short-term investors, who’ve enjoyed a 35% rally in Tesla’s stock in the last two months, cashing out to lock in their profits – and other investors getting nervous and following suit.

For markets: Two key “catalysts”.

Investors look to major events – a.k.a. “catalysts” – as opportunities to see their views on a company play out, and Tesla is revving its engine with two big ones. On October 10th, the company’s revealing its self-driving prototypes – long awaited robotaxis. Mind you, that could be a bit of a coin toss. The hope is they’ll usher in a new dawn of robotic cars, but they could be a letdown like The Homer. And it’ll be followed by earnings on October 23rd, when investors will want to see whether Tesla’s got a grip on profit margins after slashing car prices and upping incentives to beat back rivals.