Third quarter earnings season will kick off at the end of the week and between the economic slowdown and tough inflation environment, the earnings are expected to show their slowest growth of this year and the weakest since 2020, according to Refinitiv. That doesn’t mean there aren’t opportunities for investors, however, and UBS has identified both stocks with upside potential and those with downside risk. “Downgrades to out quarters are likely to be sizeable given the slowing economic activity and tighter financial,” UBS equity strategist Keith Parker said in a note Monday. “Company margins are the biggest investor concern as it relates to fundamentals with expectations for margin gains in ’23 at odds with fading sales growth. S & P 500 EBIT margins are expected to rise by 40bp to 17.7% in 2023, with consensus expecting EBIT margins to rise for 73% of firms.” He added that top performers S & P tend to rally 30% or more while the worst performers tend to fall 20-40%. “Thus, analyst fundamental conviction views should matter even more amid increased dispersion,” or the range of potential outcomes from an investment, he said. Here are 5 of UBS’ upside and downside picks heading into earnings season: Danaher , the medical and global science company, is the biggest name on UBS’ earnings surprise list by market cap. The firm is expecting it to benefit from a continuation of “strong pharma trends” and noted that it lowered its expectations last month for a material beat for the quarter. UBS expects mattress company Tempur Sealy to show an earnings beat as “industry trends” improved after Labor Day. Scanner trends that UBS says are stronger than what’s been modeled on Wall Street could help Kellogg , the packaged foods company, drive upside to earnings and potentially raise its full-year outlook. Agricultural firm Corteva and paper packaging company Sonoco are also on the earnings surprise list. On the flipside, e-signature company DocuSign and the packaged foods firm Simply Good Foods are on UBS’ watchlist for downside risk this earnings season. The group also includes some apparel retail and home goods and furnishing names like Ross Stores , the RealReal and Weber .
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