The fundamental story for stocks is holding steady more than halfway through the third quarter.
Analysts slashed their earnings expectations for the current quarter by 2.8% during July and August, per FactSet senior earnings analyst John Butters. But that’s not as bad as it may seem.
As Butters pointed out in a note on Friday afternoon, analysts typically cut their earnings estimates as the quarter goes on. The current level isn’t out of the ordinary. Analysts have slashed expectations by 3% on average for the past 20 years.
DataTrek co-founder Nicholas Colas wrote in a note to clients on Tuesday morning that these revisions are “not a cause for worry and could be a positive catalyst as we get into Q3 financial reporting season.”
Colas noted that last quarter, earnings weren’t revised down by as much as they usually are and therefore set a more challenging bar for companies to beat. As a result, companies beat earnings expectations by a lower amount than both the five- and 10-year averages during the second quarter.
The high bar carried over to stock reactions, where even companies that beat Wall Street’s estimates saw a more muted reaction than normal.
This was capped off by Nvidia’s (NVDA) earnings report on Aug. 28. The AI juggernaut posted earnings and revenue growth of more than 100%, both topping Wall Street’s estimates, but the stock faltered the next day as the market read-through appeared to be that good wasn’t good enough for investors.
Colas noted that the cutting of earnings estimates in the current quarter creates a lower bar for companies to surpass and sets the stage for a fourth quarter rally in stocks.
After earnings grew 11.3% year over year in the second quarter, they are expected to increase 4.9% year over year in the third quarter, which will kick off in earnest with big banks on Oct. 11. Citi US equity strategist Scott Chronert told Yahoo Finance the setup for the current quarter and beyond is one of “earnings resilience.”
While the growth expected in the current quarter isn’t considered stellar, Chronert noted that for the first time in six quarters, earnings from the 493 stocks in the S&P 500 not including the Magnificent 7 are growing. This, Chronert argues, supports the broadening out in the market rally over the past two months as stocks outside tech have led the charge.
Additionally, consensus currently expects double-digit earnings growth compared to the year prior throughout 2025.
“The setup should still be for an improving dynamic going into 2025,” Chronert said.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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