year-on-year change in bottom-up consensus earnings per share (EPS) estimates currently stands at -4.1% for the quarter.

while earnings growth is slowing, we think this consensus view is too pessimistic:

  • Accounting
    for the recent deterioration in the ISM manufacturing index, we expect EPS growth of -2% for the quarter. While this would be the first
    quarterly contraction in earnings since 2016, on an annualized basis 3Q S&P 500 earnings will likely be close to flat versus
    year-ago levels.

  • Flat
    earnings at the index level masks more resilient profitability for the “typical” US company. Weakness is concentrated in the energy,
    materials, and technology sectors, as well as select mega-cap stocks. The median S&P 500 company should grow earnings 4–5%.

  • It
    appears that elevated semiconductor inventories are now declining, based on recent comments from companies in the sector. In prior
    cycles, semiconductor revenues typically declined 4–5 quarters on average. This quarter will be the fourth quarter of revenue
    declines, suggesting that a rebound may not be too far away. The consumer staples and consumer discretionary sectors remain well
    supported by healthy consumer fundamentals (a strong labor market, healthy wages) and should continue to see solid organic growth.

our view, 3Q results will be a mixed bag for markets. Earnings growth remains weak and elevated policy uncertainty likely will result in a
fairly muted outlook for many companies in economically-sensitive industries. However, investor hopes for the framework of a trade deal
between the US and China should limit the downside. We think the S&P 500’s recent trading range of 2,750 to 3,025 will likely remain
intact over the next few months.

maintain a modest underweight to equities overall and prefer US versus Eurozone stocks. From a sector perspective we prefer the US consumer
discretionary, communication services, and consumer staples sectors. Read more in our latest


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