The fundamental story for stocks is that they remain flat, even midway through the third quarter.
Analysts cut their current-quarter profit estimates by 2.8% in July and August, according to FactSet senior earnings analyst John Butters. But that’s not as bad as it sounds.
As Butters noted in a note Friday afternoon, analysts typically lower their earnings estimates as the quarter progresses. The current level is not unusual. Analysts have lowered expectations by an average of 3% over the past 20 years.
DataTrek co-founder Nicholas Colas wrote in a note to clients Tuesday morning that these revisions “are not a cause for concern and can be a positive catalyst as we enter the third quarter financial reporting season.”
Colas noted that earnings were not revised down as much in the last quarter as they normally are, and that this raised the bar for companies to beat. As a result, companies beat earnings estimates by a smaller amount than both the five- and 10-year averages in the second quarter.
The high bar was extended to stock price reactions, with even companies that beat Wall Street estimates reacting more mutedly than usual.
This was capped off by Nvidia’s (NVDA) earnings report on August 28. The AI giant posted more than 100% growth in profit and revenue, both of which beat Wall Street estimates. However, the stock fell the next day as market analysis suggested that “good” wasn’t good enough for investors.
Colas noted that the cut in current-quarter earnings estimates lowers the bar for companies and paves the way for a rally in equity markets in the fourth quarter.
After second-quarter earnings rose 11.3% year-over-year, they are expected to grow 4.9% year-over-year in the third quarter. This quarter gets underway in earnest for the big banks on Oct. 11. Scott Chronert, equity strategist at Citi US, told Yahoo Finance that the picture for the current quarter and beyond is one of “earnings resilience.”
While expected growth in the current quarter isn’t considered stellar, Chronert noted that for the first time in six quarters, the 493 stocks in the S&P 500, excluding the Magnificent 7, are growing in earnings. That, Chronert argues, supports the broadening of the market rally over the past two months as non-tech stocks have taken the lead.
In addition, the consensus currently expects double-digit year-on-year earnings growth through 2025.
“The basis should still be for improving dynamics towards 2025,” Chronert said.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
Click here for an in-depth analysis of the latest stock market news and events that impact stock prices
Read the latest financial and business news from Yahoo Finance
