Third-quarter earnings season commenced this week with market participants anticipating robust results across the S&P 500. Consensus estimates compiled by FactSet projected nearly 30% year-over-year earnings growth for the index, representing an increase from 26.7% as of June 30. The technology sector, which comprises 40% of the S&P 500, was expected to deliver particularly strong performance, with estimated earnings per share growth rising to 65% from 57% on June 30, bolstered partly by upward revisions for companies including Nvidia and Micron Technology.
Earnings growth was anticipated to broaden beyond the most prominent technology companies. While the Magnificent Seven stocks were forecast to achieve average 20% growth, the remaining 493 companies in the S&P 500 were projected to deliver 27% year-over-year gains. Russell Investments and other analysts also noted healthy profit growth expectations across smaller capitalization indexes, with S&P 400 MidCap operating earnings anticipated to rise 19% and S&P 600 SmallCap earnings expected to increase 21%. Strategic firms including Barclays and UBS issued bullish outlooks, with UBS forecasting the S&P 500 would reach 8,400 by June of the following year.
However, market breadth presented challenges. Only approximately 20% of stocks were trading above their 50-day moving averages at the end of September, down from 70% in midsummer according to Morgan Stanley, with nearly 38% of S&P 500 constituents trading down 20% or more from their 52-week highs. Additionally, eight sectors had experienced negative earnings estimate revisions since June 30, led by materials, consumer staples, and healthcare.
Rising interest rates posed a significant headwind to market performance. The 10-year Treasury yield reached a 24-year high above 5.36%, up from 4.75% in August, pressuring interest-rate-sensitive sectors including utilities, consumer staples, and real estate. Major bank earnings reports scheduled for later in the month were expected to provide insight into how higher rates were affecting lending, merger activity, and initial public offering pipelines. Despite valuation concerns, with the S&P 500’s forward price-to-earnings ratio reading expensive on 17 of 20 valuation measures according to Bank of America, strategists argued that robust earnings growth could offset rate increases if major corporations beat expectations and yields stabilized.
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