Sarah Travers
As Wall Street moves through the third quarter, recent adjustments to earnings estimates have sparked discussions among investors. Analysts have revised their earnings expectations for Q3 downward by 2.8% during July and August. While this might seem concerning at first glance, it aligns with historical patterns and could even be a positive indicator for the stock market.
Historically, analysts have tended to lower their earnings forecasts as a quarter progresses. The current reduction of 2.8% is consistent with this trend, as analysts have cut estimates by an average of 3% over the past two decades. This pattern reflects a normal adjustment process rather than an alarming deviation.
The adjustments made during the third quarter are viewed as a strategic opportunity rather than a setback. Lowered earnings estimates create a lower benchmark for companies to exceed, potentially setting the stage for a strong performance in the fourth quarter. This scenario could lead to a market rally as companies may find it easier to surpass these reduced expectations.
In the previous quarter, companies faced a higher bar due to less significant revisions to earnings estimates. As a result, there was a smaller margin by which companies exceeded expectations, and stock reactions were more subdued than usual. For instance, Nvidia’s impressive earnings report on August 28, showcasing more than 100% growth in both earnings and revenue, did not lead to the expected surge in its stock price. This response underscores the challenge of meeting high investor expectations.
Looking ahead, the lower earnings estimates for Q3 could create a more favorable environment for stocks. With the earnings growth from the second quarter at 11.3% year-over-year, the projected 4.9% increase for Q3 might not be stellar but is still positive. This growth trend is expected to continue as the financial reporting season begins with major banks on October 11.
Recent data indicates a broader market shift. For the first time in six quarters, earnings from the 493 S&P 500 stocks, excluding the top seven tech companies, are showing growth. This broader earnings growth supports the recent market rally, where stocks outside the technology sector have been leading the charge.
Looking forward to 2025, analysts anticipate double-digit earnings growth compared to the previous year. This projection suggests a promising outlook for the market, with expectations of an improving dynamic as we move into the next year. The resilience observed in current earnings reports supports a continued broadening of the market rally and underscores the potential for positive developments in the near future.
While the reduction in Q3 earnings estimates might initially seem concerning, it is a normal part of the earnings adjustment process. The lower bar set for companies to surpass could foster a favorable environment for stock performance, with expectations of a strong finish to the year and positive market dynamics moving into 2025.
