Equity analyst sentiment toward corporate profits is losing momentum at a time when US stocks are trading near record highs, suggesting the rally could face speed bumps this earnings season.
A Citigroup Inc index tracking US earnings revisions — the number of analysts upgrading versus downgrading estimates — has turned flat for the first time since August. At the same time, the S&P 500 is trading at 22 times forward earnings, above the average over the past decade of nearly 19 times.
Earnings reactions will be “be varied and violent for stocks, not an upside index catalyst,” Evercore ISI strategist Julian Emanuel wrote in a note, adding that the market was already “priced near perfection.”
The third-quarter season will pick up steam from Tuesday with reports from banks including JPMorgan Chase & Co and Citigroup. Early results show investors have lofty expectations.
Shares of Levi Strauss & Co sank 13% on Friday after the apparel maker’s upgraded earnings guidance still disappointed following a 42% rally in the stock this year. Tesla Inc shares also fell even as it reported record third-quarter vehicle deliveries when most analysts had anticipated a strong quarter. The electric-vehicle maker reports earnings for the period on Oct 22.
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US Profit Expectations Have Weakened | Earnings reactions will be "varied and violent," Evercore ISI strategists say
US stocks hit a record last week on optimism around artificial intelligence and a robust economy, before President Donald Trump’s tariff threats on China derailed sentiment. US futures on Monday pointed to a rebound after Trump signalled openness to a deal with Beijing.
RBC Capital Markets strategist Lori Calvasina said that the rate at which earnings beat estimates is likely to slow compared with the previous quarter as companies feel a bigger hit from tariffs. Analysts tracked by Bloomberg Intelligence expect profits to have risen 7.4%, the smallest increase in two years.
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“Earnings sentiment is at a critical juncture for the biggest market-cap names in the S&P 500,” Calvasina said.
Meanwhile, Morgan Stanley strategists noted that the deteriorating earnings revisions breadth was in line with weaker seasonal trends for October. “We see this as a temporary pause ahead of the next leg higher given our view that earnings expectations will improve further into 2026,” they wrote in a note.
