Corporate earnings are set to become one of the biggest drivers of US stocks as investor focus returns to economic growth following Donald Trump’s US presidential election victory.
With the third-quarter reporting season in its final stage, S&P 500 companies have posted an 8.4% increase in profits — double the expected increase, according to data compiled by Bloomberg Intelligence.
Wall Street is even more optimistic for next year, as analysts expect earnings to jump 13% in the biggest increase since 2021, according to BI. For strategists at Goldman Sachs Group Inc., that bodes well for stocks at a time when the Federal Reserve has taken a “balanced” view on growth and inflation risks.
“We expect earnings will be the primary driver of forward equity returns,” strategist David Kostin wrote in a note dated Nov. 8.
The America-first trade — buying up assets that win when the US outperforms the rest of the world — sent the S&P 500 to a record last week on bets Trump is set to unleash polices that will spur growth and insulate the world’s largest economy from overseas competition. The Fed also cut interest rates, with policymakers noting that inflation had “made progress” toward the central bank’s goal.
Still, Trump’s idea of imposing a 10% to 20% tariff on all goods coming from abroad is also a key concern for investors given the threat of retaliatory moves and reduced consumer spending, while Trump’s protectionist stance could reignite inflation. With the benchmark S&P 500 up 26% this year — poised for its biggest increase since 2021 — some market participants warn that both equity exposure and valuations are stretched.
Consistent earnings downgrades since September have also stoked worries about next year’s estimates, but Goldman’s Kostin said the trajectory of revisions was returning to “normal” after remaining unusually strong in the first eight months of 2024.
The strategist estimates that each 1 percentage point reduction in the statutory domestic tax rate would lift S&P 500 earnings-per-share by slightly less than 1%. He also sees support from potential deregulation, while tariffs could crimp profits.
At RBC Capital Markets LLC, strategist Lori Calvasina warned of a possible decline in stocks over the coming weeks as “there’s not much capacity to absorb disappointing news.”
“Election uncertainty has dissipated, and US equities are feeling optimistic over the direction of government policy,” Calvasina wrote in a note. “We also believe that short-term pullback risks exist given what we’re seeing on our positioning and valuation data. Overall, we’re getting ready for a more dynamic backdrop which requires more nimbleness in trading in the year ahead.”
This article was provided by Bloomberg News.