Souring S&P 500 Profit Outlook a Bad Sign for Stock Market Rally
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(Bloomberg) -- Wall Street analysts are quickly scaling back their forecasts for Corporate America’s earnings growth over the next year, which could pump the brakes on the blistering stock market rally before long.
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A key indicator known as earnings-revision momentum — a gauge of upward-to-downward changes to expected per-share earnings over the next 12 months for the S&P 500 — has slumped into negative territory and is hovering near its second-worst reading in the past year, according to data compiled by Bloomberg Intelligence.
Corporate earnings have been the cornerstone of the stock market’s rally for most of the past decade. Souring outlook on profit growth may dent a further S&P 500 advance after this year’s run made valuations stretched and positioning elevated. The benchmark has been on track for its second consecutive year of gains, rising more than 20%, and is at its most expensive level since April 2021.
Stocks are being “set up for a reversal,” said Gina Martin Adams, chief equity strategist at BI. “The big issue heading into 2025 is whether the Fed will be able to continue easing policy and if earnings momentum will favor laggards outside of Big Tech.”
Of course, analysts still expect the S&P 500 to deliver its second-best period of profit growth since early 2022 in the third quarter as earnings broaden beyond Big Tech, BI data show. With roughly 90% of companies in the index having already reported, S&P 500 profits are projected to climb by 8.5% through September from a year ago, double the 4.2% estimate at the start of earnings season.
While profits are expected to grow for a fifth-straight quarter, analysts have marked down EPS estimates for the next 12 months after executives delivered mixed outlooks or held back on offering guidance amid uncertainty over Federal Reserve interest-rates cuts, weakness in China’s economy and questions about fiscal policy in Washington.
Even before Donald Trump’s presidential election win, earnings-revision breadth for the S&P 500 was hovering near neutral for the past several months. Companies were “uncertain on 2024 outcomes and have been reluctant to guide further on 2025,” strategists led by Mike Wilson at Morgan Stanley wrote in a note to clients.
The earnings outlook for all of 2025 has barely budged even as analysts have raised third-quarter estimates. Wall Street sees S&P 500 companies earning around $274 per share next year, slightly below projections of roughly $277 a year ago, according to data compiled by BI.