S&P 500 Record Rally Meets Risk of Peaking Earnings Growth Natalia Kniazhevich For Corporate America, the bar to deliver earnings growth that satisfies Wall Street’s bulls is only getting higher. While third-quarter estimates look solid for the S&P 500 Index, 10 of the 11 sectors in the gauge are expected to post a decrease in the pace of earnings growth from the previous three-month period, data compiled by Bank of America Corp. show. Analysts expect S&P 500 income growth to slow to 18% in the first half of 2027 from 25% in the third quarter of 2026 and 28% in the fourth quarter, data compiled by Bloomberg Intelligence show. While in isolation, the dimming outlooks are not enough to derail the stock market rally. But with stocks sitting near records and worries growing that inflation pressures are stickier than expected, Corporate America will face a tall task of delivering robust enough results to power stocks to yet another record.
We see early signs that earnings momentum may be peaking,” said Luca Paolini, chief strategist at Pictet Asset Management. “With the bar for earnings growth set so high, even modest disappointments could trigger brutal market reactions.” For years, earnings season has provided a reliable remedy to most stock market woes, with signs of reassurance in Corporate America’s fundamentals pushing the benchmark equities gauge higher. Since the start of 2021, the S&P 500 has posted a 15.2% annualized return during the time when its companies reported quarterly scorecards, well above the long-term average, data compiled by Bloomberg Intelligence show. By any token, the 25% earnings growth expected in the third quarter is stellar, but that may not be enough to impress investors if companies’ outlooks fall short of what’s already priced into shares.
Healthy 3Q beats are expected, but further upside likely depends on confidence that strong growth can extend into 2027,” Bank of America strategists including Savita Subramanian wrote in a note to clients. The bank’s data show healthcare is the only sector that’s expected to see a pickup in year-over-year profit growth in the third quarter from the period before. Lately, investors have been in a less-forgiving mood than usual. In four of the past six reporting cycles, the one-day stock reaction to earnings beats has been below historical median levels, while companies missing estimates have faced steeper than usual penalties, according to Andrew Tyler, head of global market intelligence at JPMorgan Chase & Co. If history is any guide, the peak in earnings growth by itself is less important than where S&P 500 profits settle afterward, data compiled by Franklin Templeton show. Since 1980, the S&P 500 has gained 19.6% on average in the year after peak EPS growth, assuming EPS growth continued to be above 10%. However, when net income growth fell below that level, the index has gained only 6.1% in the next 12 months. So far, 12-month estimates indicate that S&P 500 profit may advance around 18% in the next 12 months, suggesting investors have little to worry about.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing