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US companies charm investors with strong third-quarter earnings

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A strong earnings season has powered Wall Street stocks to new record highs, helping to insulate equity investors from the volatility that has rocked bond markets in recent weeks.

Of the more than 400 companies on the blue-chip S&P 500 index that had reported their results by Thursday last week, 81 per cent of them posted higher earnings than consensus estimates, according to FactSet data.

Overall, profits among S&P 500 constituents are up about 40 per cent in the third quarter compared with the same period the previous year, with sales up by about a fifth.

The so-called “beat rate” is lower than the record-breaking first two quarters of the year — when companies were boosted by economic reopening and flattering comparisons with early 2020 — but still on track to be one of the top five quarters on records going back to 2008.

In part, the outperformance reflects relatively low expectations. Profit warnings in late summer and early autumn meant some negative news had already been baked into analysts’ estimates and priced in to stocks.

However, while rising costs were a common refrain in earnings reports as feared, many companies such as food and beverage makers Mondelez and PepsiCo as well as consumer products company Procter & Gamble said they were managing to pass on the costs without suffering a big hit to demand.

Line chart of leading US stock indices, year to date (rebased) showing stock markets have surged during third-quarter earnings season

Strong results helped the S&P 500 to set 10 record highs since late October, and gains have not been limited to a small number of mega-cap stocks; the Russell 2000 index of small companies also hit a record high last week for the first time since March.

The upbeat performance comes after a more subdued end to the third quarter, with the S&P 500 in September notching its second monthly loss of the year. It also marks a stark contrast to fixed income markets, where many investors have been wrongfooted by bad bets on central bank policy in recent weeks.

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