Despite the rise in oil, TASI's profits face a test in the third quarter, with the banks at the forefront

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While the Saudi Stock Market Index (TASI) ended the third quarter down to 10,441 points after a 3.3% decline during the period, the market is entering the results season amid an equation that seems more complex than usual; Overall profits are relatively stable, but with sharp variations between sectors, and geopolitical uncertainty regarding events in the region, which continues to cast a shadow over investors' decisions.

Aljazira Capital expects the combined net profits of the 66 companies under its coverage to decline by 2.7% on an annual basis to about 21.9 billion riyals, while adjusted profits after excluding exceptional items will decrease by only 1.5%, while profits are expected to grow by 10.7% compared to the second quarter.

Projections reveal that the true picture of the market is mixed, as sectoral contributions differ clearly. The banking sector is likely to achieve annual growth in profits by about 7.1% to 9.3 billion riyals, supported by the growth of loans and deposits and high profit margins after the tightening of US and Saudi monetary policy.

On the other hand, the transportation sector’s profits are expected to decline by more than 54% on an annual basis, with continued pressure on airlines and services related to air transport, while Ma’aden’s profits will decline by about 14.2% as a result of pressures on prices and profit margins.

As for the petrochemical sector, it presents one of the most notable transformations during the third quarter, as it is expected to return to profitability, achieving 353 million riyals after recording losses of approximately two billion riyals in the previous quarter, benefiting from the absence of exceptional losses and a relative improvement in operating margins.

The irony is that the third quarter witnessed an exceptional jump in oil prices, as Brent crude closed at $103.5 per barrel, up 42% compared to the end of the second quarter, driven by geopolitical tensions and concerns about supplies.

But this boom was not fully reflected in the results of listed companies.

The significant rise in energy prices was accompanied by an increase in shipping and insurance costs and the disruption of some supply chains, in addition to disturbances related to trade and energy corridors in the region, which limited the benefit of many industrial sectors from the rise of oil.

Therefore, the results of the third quarter appear to be more of a reflection of the complex state of the global economy, rather than a mere reflection of the trend of oil prices alone.

These expectations come days after the issuance of the Saudi budget statement, which confirmed the state’s continued implementation of strategic spending and investment plans linked to Vision 2030 despite global economic fluctuations.

Here an important point emerges for investors. While the oil GDP registered pressures due to the Iran war during the first half of the year, non-oil activity continued to grow, and the Purchasing Managers’ Index remained above the level of 53 points, which reflects the continued expansion of the non-oil economy.

Therefore, the expected strong performance of banks, healthcare, and some technology and service companies can be viewed as a direct reflection of continued government spending and investment, and not just the result of the traditional business cycle.

The budget statement indicates the continuation of major investment plans within Vision 2030, which is an important support factor for corporate profits during the fourth quarter and beyond.

From a market perspective, the expected results seem capable of charting two different paths for the index during the last quarter of the year.

If the results of banks and petrochemicals are better than expectations, TASI may find support that allows it to return to levels above 11 thousand points, especially if oil prices stabilize at high levels and government spending continues unchanged.

However, if pressures on the transportation and basic materials sectors continue and additional non-positive surprises appear in the results of major companies, the index may remain in a sideways trading range with continued caution among investors.

It is noteworthy that the decline in daily trading volumes to about 4.3 billion riyals from 5.4 billion riyals in the previous quarter indicates that the market is currently dealing with clear caution and is waiting for new stimuli before taking a decisive direction.

Perhaps the most important impact of these expectations is not on profits themselves, but on investor behavior. Market performance is likely to be selective rather than a collective bull or bear market, which increases speculation on individual companies' results.

Investors will await the dates of business results, which may witness an increase in volatility, while the market may witness a rapid transfer of liquidity between sectors, and an increase in the gap between growth-related stocks and cyclical stocks.