The onset of the third-quarter earnings season has opened a Pandora’s box with investors glued to quarterly releases, looking for stocks that are poised to beat earnings.

Market pundits are of the view that a company’s earnings performance is possibly the most important factor influencing its stock price.

No wonder then, in the world of finance, earnings are indeed both literally and figuratively ‘the bottom line.’

Headwinds Prevail

Weakness in the Energy sector, a strong U.S. dollar and lackluster global growth — particularly in China and other emerging markets — has been clouding the earnings picture in the last few trailing quarters and we expect these headwinds to impact third-quarter results as well.

Notably, the Q2 earnings picture has been quite dismal, with earnings for the S&P 500 index (SPY) down -2.2% from the same period last year on -3.5% lower revenues.

What to Expect?

Overall earnings for the S&P 500 index are expected to be down -5.9% in the third-quarter from the same period last year on -5.8% lower revenues, with the figure barely moving into the positive territory even after the negative impact of the Energy sector is excluded. (Read more: Earnings Weakness Isn’t Just Energy Driven)
 
As is always the case, guidance will be key, which will determine expectations for the current period. Earnings growth for the last quarter of the year are currently expected to be in the negative as well, with the expected decline rate likely to expand in the coming days as companies report results and guide lower.

What to Do?

Of late, the market has been preoccupied with global concerns and the Fed rate hike decision. However, as third-quarter earnings take the spotlight, it’s time for investors to put these macro issues behind and instead focus on readjusting their portfolios to capitalize on market predictions for this earnings season.

Despite the uncertainties, a number of companies will rise above all odds this season. Thus, investors can successfully beat the market by picking and investing in such stocks that are likely to trump earnings in the to-be-reported quarter.

How to Screen the Outperformers?

With a wide range of stocks thronging the investment space, it is by no means an easy task for investors to arrive at stocks that have the potential to deliver better-than-expected earnings.

While it is impossible to be sure about such outperformers, our proprietary methodology – Earnings ESP – makes it relatively simple.

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