Investors may be in for a series of encouraging financial announcements this earnings season. David Kostin, a prominent U.S. stock market expert at Goldman Sachs, suggests that current market forecasts underestimate the economy's underlying strength, setting the bar for S&P 500 earnings growth too modestly. While the prevailing analyst consensus projects a deceleration to 6% growth in the third quarter from 11% in the second, Kostin's team anticipates that actual results will exceed these predictions. This optimism is fueled by expectations of robust sales performance and the continued impactful contributions from the leading technology companies, collectively known as the \"Magnificent 7.\" This potential for better-than-expected earnings could provide a significant boost, helping to sustain the market's upward trajectory as the year concludes, a period traditionally favorable for stock performance.
A resilient economic landscape, coupled with the consistent outperformance of the \"Magnificent 7,\" is poised to drive these projected earnings beats. Despite Wall Street's conservative estimates of real sales growth, which show a decrease from the prior quarter, Goldman Sachs economists forecast a healthier 2% GDP growth for the third quarter, aligning with the previous quarter's figures. While less favorable foreign exchange rates, specifically the stabilization of the U.S. dollar, might temper international sales boosts seen earlier in the year, the impact of the \"Magnificent 7\" remains a key factor. These tech giants have been pivotal in driving S&P 500 earnings growth, and despite analyst expectations for a slowdown, they have historically surpassed forecasts, reinforcing their potential to once again exceed predictions.
Notably, there's been a shift in analyst sentiment, with earnings estimates being revised upwards for the first time in nearly two years. FactSet Research's Senior Earnings Analyst, John Butters, highlighted a 0.1% increase in the aggregate S&P 500 earnings per share estimate during the third quarter, marking a significant turn from previous trends. This increased confidence, however, comes with a caveat. Kostin warns against anticipating a repeat of last quarter's substantial revisions, attributing the more modest outlook to a stable economic and tariff environment. He also points out that customs duties are expected to pose a greater challenge this quarter, with a significant increase in total costs, which might limit substantial profit margin expansion despite companies' mitigation strategies.
In this dynamic financial environment, the market's potential to defy conservative expectations underscores the importance of a nuanced understanding of economic indicators and corporate performance. The interplay of a robust economy, technological leadership, and evolving market sentiment provides a compelling narrative for investors navigating the complexities of the current financial landscape.