Stocks Set to Rally in Fourth Quarter as Earnings Expectations Lowered: Analysts
The fundamental story for stocks is holding steady as we navigate through the third quarter of the year. Analysts have recently reduced their earnings expectations for the current quarter by 2.8%, which may seem concerning at first glance. However, this is a common occurrence as analysts tend to adjust their estimates as the quarter progresses. In fact, over the past 20 years, analysts have typically slashed expectations by an average of 3%.
Nicholas Colas, co-founder of DataTrek, believes that these revisions should not be a cause for worry. In fact, he sees them as a potential positive catalyst as we approach the Q3 financial reporting season. Colas points out that last quarter, earnings were not revised down as much as usual, setting a higher bar for companies to beat. This resulted in companies surpassing earnings expectations by a smaller margin than in previous quarters.
One example of this trend is Nvidia, which reported earnings and revenue growth of over 100%, exceeding Wall Street’s estimates. However, the stock faltered the next day as investors felt that the results were not good enough. Colas suggests that the current cutting of earnings estimates could actually set the stage for a fourth-quarter rally in stocks.
Looking ahead, earnings are expected to increase by 4.9% year over year in the third quarter, with big banks kicking off the reporting season on October 11. Scott Chronert, a US equity strategist at Citi, believes that we are entering a period of “earnings resilience.” For the first time in six quarters, earnings from the S&P 500 stocks are growing, excluding the Magnificent 7. This growth supports the recent broadening out in the market rally, with stocks outside of the tech sector leading the charge.
Furthermore, consensus forecasts anticipate double-digit earnings growth throughout 2025. Chronert remains optimistic about the future, stating that the setup should be for an improving dynamic as we head into the next year.
In conclusion, despite the recent adjustments to earnings expectations, there is reason to be optimistic about the stock market’s performance in the coming months and years. The current environment of earnings resilience and growth projections bode well for investors looking to capitalize on potential opportunities in the market.
Josh Schafer, a reporter for Yahoo Finance, provides valuable insights into the evolving landscape of the stock market. Follow him on Twitter @_JoshSchafer for more updates on market trends and developments. For in-depth analysis of the latest stock market news and events, visit Yahoo Finance’s dedicated section on stock market news. Stay informed with the latest financial and business news from Yahoo Finance to make well-informed investment decisions.