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Per estimates compiled by FactSet, the S&P 500 is expected to notch YoY earnings growth of 7.9% in Q3 25 which, if realised, would mark the 9th consecutive quarter of growth. Meanwhile, in terms of revenue, 6.3% YoY growth is expected, a pace which would not only mark the second fastest rate since Q3 22, but also the 20th consecutive quarter of revenue growth for the benchmark index.
That said, as we approach earnings season, the S&P 500 remains ‘overvalued’ by traditional valuation metrics, with the 12-month forward P/E ratio currently sat at 22.5, considerably above both the 5- and 10-year averages. That said, this has been the case for some time now, and these lofty valuations have neither derailed the recent rally, nor do they – on their own – present a reason for bearishness.
Drilling down to a sectoral level, eight of the index’s eleven sectors are set to report YoY earnings growth, with that growth set to be led by the tech sector. Of the three sectors where a YoY contraction in earnings is foreseen, the energy sector is expected to be the laggard. Interestingly, energy is also set to be the only sector not reporting YoY revenue growth, as President Trump’s ‘drill baby, drill’ agenda struggles to get off the ground, and crude benchmarks continue to come under pressure.
As is typically the case, reporting season will begin with the major Wall St banks kicking things off, led by JPMorgan who release figures before the open on 14th October. The outlook for the banking sector is a relatively positive one as we move towards the end of the year, not only as the monetary policy and regulatory backdrops become increasingly favourable, but also as the long-awaited pick-up in M&A activity finally appears to be gathering steam.
Traders’ attention will also, unsurprisingly, fall on reports from the ‘magnificent seven’ stocks as reporting season progresses, with the bulk of these reports due in late-October, and early-November.
In terms of this group, all seven of the stocks now trade in positive territory YTD, since Apple flipped into the green in mid-September. The upcoming season should prove to be a positive one, even if the bar is a very high one in terms of expectations, with Q3 earnings set to have risen by 12.1% YoY, on revenue growth of almost 15% YoY.
Along with the figures themselves, market participants will be heavily focused on guidance that the ‘Mag 7’ names deliver, chiefly in terms of AI-related capital expenditure in coming quarters, and perhaps most importantly how this capex is likely to be monetised moving forwards, with notable progress having been made on that latter front in Q2, and momentum clearly beginning to move in the right direction.
Taking a step back, the upcoming earnings season is set to be an important test for the market, with equities having rallied strongly since the post-Liberation Day bottom in mid-April, and with major benchmarks coming into reporting season at, or very close to, record highs. The tech sector, in particular, looks to be ‘priced to perfection’ as these key earnings figures loom.
To recap, the bull case which has propelled the market higher over the last six months has three key pillars – robust earnings growth, a resilient underlying US economy and, now, expectations that the monetary backdrop will become increasing loose over the coming months. Quite obviously, the first pillar of that bull case will now come under close examination as we move through the next six weeks or so.
Assuming earnings are as solid as expected, or even better, the path of least resistance should continue to lead convincingly higher into year-end, especially with the re-emergence of a ‘Fed put’ providing additional confidence for investors to remain further out the risk curve. While there is some risk of a pullback were reporting season to disappoint, any equity dips should continue to be viewed as buying opportunities, so long as the underlying economy remains solid.
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