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This Earnings Season Should Ease Your Recession Fears

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The economy is stronger than most people believe. And we’ll get proof of that over the next few weeks.

No, I’m not talking about economic data. There are plenty of positive economic indicators right now, like extremely low unemployment, strong wage growth, better-than-expected retail sales and falling inflation… but it’s not all flowers and honey.

Other data points, like low consumer confidence, are concerning. And everyone and their brother-in-law seems to be expecting a recession. (But perhaps that’s another reason to think we’ll avoid one.)

The true signal of where the economy is going will be corporate earnings.

The S&P 500’s earnings have slipped year over year in each of the past three quarters, but third quarter earnings are expected to be flat relative to last year’s third quarter. And remember, earnings expectations are a little dance put on by CEOs and analysts.

Corporate CEOs usually provide conservative guidance so they’ll look like heroes when they beat expectations. And analysts, whose firms are usually trying to win investment banking business from the companies they cover, go along with the game so they can stay in the companies’ good graces.

Earnings season unofficially started last Friday, when big banks like JPMorgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) reported quarterly results.

Over the coming weeks, we’re going to get an avalanche of earnings reports every day – both before the market opens and after it closes. And these earnings reports are often catalysts for strong stock moves.

For example, in August, DraftKings (Nasdaq: DKNG) surged as much as 16% in one day after beating earnings expectations and raising guidance.

And Autoliv (NYSE: ALV) jumped more than 10% in one day on an earnings beat in July.

When I’m picking stocks to trade heading into earnings, one of the things I look for is a consistent track record of beating expectations. That doesn’t guarantee the company will beat expectations again, but it does show that the company’s leadership is skilled at managing Wall Street and overdelivering on its own guidance.

Booz Allen Hamilton (NYSE: BAH) has beaten expectations in each of the last 16 quarters. The company will report earnings on October 27. Again, there’s no guarantee that its earnings will come in higher than Wall Street’s forecast, but I’m sure management doesn’t want to ruin a strong track record of earnings beats. My guess is that it has expertly managed Wall Street’s expectations so that the company’s numbers will be above Wall Street’s estimates.

In addition to a solid history of beating expectations, I like to see earnings and revenue growth. Booz Allen Hamilton is projected to increase earnings per share by 10% in its fiscal 2024, which ends in March. Revenue is forecast to grow by nearly 12%.

So in order to capitalize on earnings results, look for strong companies that have consistently beaten expectations and grown their earnings and revenue. That will strengthen your odds of picking a winner and making good money on a short-term trade.

This earnings season will be an important barometer for how the economy is doing. I expect the results to be stronger than anticipated… and to provide many opportunities for shorter-term profits.

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