Two Stock Sectors Crushing Earnings Season so Far—and One Laggard

The third-quarter earnings season is well underway. Roughly two-thirds of companies in the Morningstar US Market Index have reported results, and the picture looks positive so far.

The index is on track for roughly 5.4% earnings growth for the third quarter compared with a year ago—a figure that includes results from companies that have already reported and FactSet’s estimates for those yet to report. That’s less than the second quarter’s 10.0% growth, but an improvement over the third quarter of 2023, when companies in the index grew their earnings by a little less than 4.5%.

Much of the momentum behind this positive performance comes from a strong economy that has endured despite headwinds. “With the US economy running faster than anyone expected at the beginning of the quarter, most companies have had no problem either meeting or beating consensus,” writes Morningstar chief US market strategist Dave Sekera.

Tech Stocks Keep Delivering

Some of the biggest earnings growth in the third quarter is expected to come from the communication services sector, which is on track for growth of nearly 18%. That category includes tech heavy hitters Alphabet GOOG/GOOGL and Meta Platforms META, as well as entertainment giants Netflix NFLX and Disney DIS.

Alphabet posted especially strong results, prompting Morningstar’s analysts to raise their fair value estimate of the stock to $222 per share from $209. Despite concerns over Alphabet’s search business, analyst Malik Ahmed Khan says the firm’s financial position is “virtually unassailable.”

Meanwhile, the technology sector has reported a slight dip in earnings growth so far, but it’s expected to post growth of 8.2% by the end of the season. Apple AAPL and Microsoft MSFT are part of this sector. Nvidia NVDA is also in this sector but reports earnings much later in the season.

Consumers Keep on Spending

Another bright spot this season has come from the consumer cyclical sector, which includes entertainment, auto, travel, and retail companies. Overall, that category is expected to see 19.4% earnings growth, despite ongoing concerns that a slowing economic environment would dent consumer spending. While that outcome is still possible, it didn’t materialize broadly in the quarter.

One notable exception was Starbucks SBUX, which saw its net income fall more than 25% compared with the year-ago quarter. Morningstar analysts lowered their fair value estimate for the stock based on weak guidance. “We are disappointed that US traffic fell by a striking 10% and expect costly remedial measures as we move into fiscal 2025,” wrote analyst Sean Dunlop.

Energy Companies Struggled as Oil Prices Fell

So far, the worst-performing sector this earnings season has been energy, which is on track to see earnings fall 28% compared with the year-ago quarter. Oil prices, as measured by WTI crude futures, have fallen 8% over the past six months and nearly 23% over the past two years, which has eaten into profits for the sector overall.

That said, Morningstar strategists are still bullish on the sector, which they see as undervalued. “The risk/reward dynamics here look positively skewed to us,” Sekera writes. “If oil prices stay at current levels or move higher, there is significant upside leverage. If oil prices slide to our forecast [$55], you are still buying these stocks at a significant margin of safety.”

What’s Ahead for Investors

Earnings season isn’t just about the last quarter’s results; it’s also a time for companies to give investors insight into their likely performance down the line. Strategists say slowing economic growth means investors should keep a close eye on this guidance.

“Although the economy has been running hotter than anticipated, it is still generally expected to slow in the fourth quarter,” writes Sekera. “As such, many management teams have been providing conservative revenue guidance in anticipation of this slowdown.”