The bar for earnings season has been lowered, but that doesn’t mean it’s any easier to clear. Analysts expect U.S. companies to post weaker profit growth in the third quarter — about half the pace of the spring surge — as margin magic gives way to cost math. Big tech companies are still doing the heavy lifting, but for everyone else, “resilient consumer demand” has started to look like a challenge.
After two quarters of double-digit earnings, S&P 500 earnings growth is projected to slow to about 8.8% year over year, down from about 13% in the second quarter and 11% in the first quarter. If oil and gas are excluded, the figure rises to 9.6%, but the story is the same: the profit engine is still running, but not at full speed. Investors are looking for evidence that the next leg of the rally can be supported by fundamentals.
The macro context is not exactly welcoming. The Atlanta Fed’s GDP now has third-quarter growth near 3.1%, a reminder that momentum remains decent but cooling rapidly. Inflation remained around 2.9% in August after 2.7% in July, and the 10-year Treasury stalled just above 4%, keeping valuations tight and nerves tighter. It’s a combination that doesn’t herald a crisis: just a market where even ordinary numbers can look like warning signs.
The slowdown is not evenly distributed. Information technology, according to FactSet, remains the growth driver with earnings growth expected to be around 21%, followed by communication services and finance. And other FactSet data shows that IT has one of the biggest upward revisions and highest growth expectations, but that also means it carries a heavy load: any stumbles in that regard carry amplified consequences.
At the other end of the spectrum, energy and consumer staples are forecast to contract, reflecting collateral damage from falling raw materials and sticky costs. The combination leaves the market’s bullish trend unbalanced: hot stocks have to stay hot, while defensive ones can’t afford to cool down.
Energy, in particular, seems fragile. Falling crude oil and uneven refining margins have analysts lowering forecasts week by week. ExxonMobil, which reports at the end of the month, warned in its latest 8-K that every move of a few dollars in oil could swing earnings by hundreds of millions. Commodities face a slower headache: input inflation and consumer fatigue. Price increases that boosted profits last year now risk repelling buyers. The result is a setup where even a solid quarter could land with a shrug.
Goldman Sachs says these 20 “overlooked” names – from Celsius Holdings to Cameco, Wynn Resorts and Broadcom – are about to skyrocket. In a market obsessed with the same tickers, the quiet winners could possibly generate the loudest reactions in the third quarter. Goldman’s note points out that the last quarter saw the craziest stock market movements since 2009; Conviction, not magnitude, moved prices.