Key Takeaways:
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Analysts forecast 4.3% profit growth for S&P 500 in Q3.
Big-tech firms drive growth; non-tech sectors show modest increases.
Political uncertainty may delay traditional capital investments.
What Happened?
Earnings season has begun, with the S&P 500 companies projected to show a 4.3% profit growth for the third quarter, according to Bloomberg Intelligence. This marks the weakest performance in four quarters. Earlier, analysts expected an 8.4% rise, but the forecast has since been slashed.
Despite this, the S&P 500 remains up 22% for the year, the best start since 1997. Interestingly, the “Magnificent Seven” tech giants, including Apple and Tesla, continue to lead with an 18% profit increase, although this is a slowdown from last year’s 30% growth.
Non-tech S&P 500 firms anticipate a 1.8% rise, indicating a second consecutive quarter of growth.
Why It Matters?
This earnings season tests the strength of the US stock market’s $9 trillion rally. With lower expectations, companies might exceed forecasts, potentially boosting stock performance.
Ross Mayfield, a strategist at Baird, suggests the lowered earnings estimates could lead to more companies beating expectations, enhancing equity performance. However, challenges persist. Energy sector profits are expected to decline by over 20% due to falling crude prices.
Analysts will scrutinize profit margins, which are predicted to slightly dip to 12.9% from 13.1% in the previous quarter. Meanwhile, European markets face downgrades amid weak economic growth, impacting luxury brands like LVMH.
What’s Next?
As results unfold, expect significant stock movements, especially in technology, communication services, and healthcare sectors, which are predicted to post over 10% profit expansions.
The energy sector, however, may struggle. In Europe, any guidance on weakening consumer demand could lower high 2025 forecasts, affecting stock prices. With the US presidential election approaching, corporate investment activity may accelerate post-election, especially in AI, despite potential delays in traditional investments due to political uncertainty.
Jeff Buchbinder from LPL Financial notes that AI investments are likely to continue, but other capital commitments might pause until after the election. Keep an eye on how companies navigate these economic and political landscapes.
