Equity investors are meting out some of the harshest punishments ever for companies that miss expectations, as strategists warn earnings growth has likely peaked. Amazon.com Inc. and Alphabet Inc. recently faced sharp post-earnings selloffs, with AI-related stocks dragging major benchmarks to their worst day since June. Investors in communications services stocks are now penalizing misses with the steepest selloffs since Bloomberg began collecting data in 2019.
The market is "a lot more sensitive than it might normally be," said Chris Zaccarelli, chief investment officer at Northlight Asset Management, adding that investors would rather sell first and ask questions later rather than get stuck nursing further losses. Strategists from Wells Fargo to Franklin Templeton predicted the S&P 500 corporate earnings expansion would decelerate as higher interest rates, tariff pressures and elevated oil prices weigh on results.
Roughly a third of the way through the reporting season, earnings growth has slipped to roughly 26%, below the 32% growth rate seen in the second quarter. Tech profit growth is seen decelerating to 65% in the third quarter, from nearly 77% last quarter, while communications services is expected to slow to just 3.2% from nearly 10%.
Kimberly Forrest of Bokeh Capital Partners said investors are "trimming some of their excessive gains" in tech to pick up cheaper stocks elsewhere, rather than completely selling out of an equities market still poised to grow earnings. S&P 500 earnings growth is set to track closer to 20% over 2027-2028, above the 10% threshold historically required for continued market advancement.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing