Third quarter earnings season kicked off this week with a bang!

Big investment banks were among the first to report. BlackRock (NYSE: BLK), Citigroup (NYSE: C) and JPMorgan Chase & Co. (NYSE: JPM) announced earnings on Tuesday. All three posted strong and better-than-expected revenue and net income for the quarter.

But that pales in comparison to what Goldman Sachs (NYSE: GS) had to report… It blew expectations out of the water. The bank posted record profits, as heightened volatility in financial markets allowed its traders to make huge gains in the July to September quarter.

So, after suffering terrible first and second quarters, it seems the tide is finally turning for banks.

How to Play the Game

This earnings season could very well see a lot more of this positive movement, and see it coming out of sectors far beyond banking.

Earnings season is a grand exercise in managing expectations, a game played by companies, analysts and investors alike. The hope is that expectations about companies’ revenue and income results can be fine-tuned so those companies can “beat” the expectations set on Wall Street, sending their share prices higher.

This can quickly devolve into a hall of mirrors, with analysts adjusting earnings expectations up and down as actual earnings announcements approach. Eventually a consensus emerges, which investors use to judge whether the company underperformed or outperformed expectations.

This cycle of setting and adjusting earnings expectations happens like clockwork, four times annually. In this case, there’s a sudden chill in the air? Pumpkins are appearing on porches? It’s third quarter earnings season!

However, due to the pandemic and the havoc it has wreaked on companies’ revenues, income and ability to make accurate predictions about the future, this particular earnings season could be a massive departure from the past.

“This is Income Expert Marc Lichtenfeld told me on Monday. “After the destruction in the second quarter, we’ll get a clearer picture of the companies that have figured out a way to thrive versus those that are struggling to merely survive – as well as those that won’t make it.”

Marc, by the way, is one of America’s premier experts on earnings and how they impact stock prices.

Overall, earnings are expected to decline this quarter due to the economic damage wrought by the pandemic and the shutdown.

According to FactSet, which tracks company and investing data, the S&P 500 is expected to report the second-biggest year-over-year third quarter earnings decline since 2009. As of Monday, the consensus was that earnings for companies in that index will fall 20.5%.

Yet, because earnings forecasts are managed, companies tend to beat them. Look at the chart below and see for yourself…

s&p earnings growth

You can see that actual earnings tend to be consistently better – or less bad – than the estimates. The only exception to this in the chart above was the first quarter of this year, when the pandemic came out of the blue to wallop the economy and company earnings and caught analysts completely off guard.

Over the past five years, companies in the S&P 500 have exceeded earnings estimates by 5.6% on average, according to FactSet. So the real expectation, after adjusting for this fact, is that third quarter earnings will be down about 15% year over year.

As one CNBC headline about expectations had it, “Results should be much better than expected.” (See what I mean about a hall of mirrors?)

Opportunities Abound in This Important Earnings Season

Despite that confusion, “This is going to be a particularly interesting earnings season,” Trends Expert Matthew Carr wrote in an email to me on Monday.

He predicts there will be scores of companies that report solid and better-than-expected earnings “because they adapted and were able to pivot their businesses to boost sales in spite of the pandemic.” In fact, he’s expecting some “high double-digit and triple-digit surges in earnings and revenue.”

That means some fantastic opportunities. According to Marc, “Companies that post better-than-expected numbers are likely to see their stocks soar as investors breathe a huge sigh of relief, while those that miss will be punished.” (If you’re interested in tracking when companies report their earnings, try this helpful earnings calendar from Yahoo Finance.)

“There will be a ton of news,” Marc says. “It’s going to be a wild ride, and a lot of money will be made for those who own the winning stocks.”

I, for one, am looking forward to it. You should be too.

If you want to know more about this earnings season and the many profit opportunities it will likely deliver to investors, Marc has a very special event coming up.

In a free online summit on October 21, Marc will provide his expert guidance for identifying the breakout winners this earnings season – probably the most important one of our lives. So be sure to sign up for the Blockbuster Earnings Season Kickoff.

Be sure to check your email tomorrow for more up-to-the-minute insights from Investment U’s top market experts.

Enjoy your day and stay safe,