Key profitability indicators of enterprises falling into negative territory, will the bullish momentum of US stocks experience a "sudden brake"?

Wall Street analysts are rapidly lowering their expectations for next year's earnings growth of American companies, which could soon put the brakes on the stock market's strong rise. Compiled data shows that a key indicator called the "earnings revision trend" - measuring the upward and downward changes in earnings expectations for the next 12 months per share of the S&P 500 index - has fallen into negative territory and is hovering near the second worst level in the past year. For most of the past decade, corporate earnings have been the cornerstone of stock market gains. Against the backdrop of this year's rise, which has led to overvaluation and increased positions, deteriorating profit prospects may weaken further rises in the S&P 500 index. The benchmark index has risen for the second consecutive year, with gains exceeding 20%, reaching its highest level since April 2021. BI's Chief Equity Strategist, Gina Martin Adams, said that the stock market is "preparing for a reversal. One big question entering 2025 is whether the Fed can continue to ease policies, and whether the earnings trend is favorable for lagging companies outside of the large tech firms". However, BI's data shows that analysts still expect the S&P 500 index to achieve its second best profit growth since early 2022 in the third quarter, as overall earnings will outstrip those of large tech companies. With about 90% of the index's component stocks already reporting earnings, profits for the S&P 500 index are expected to grow by 8.5% higher compared to the same period last year by September, doubling the initial estimate of 4.2% at the beginning of the earnings season. Although profits are expected to grow for the fifth consecutive quarter, analysts have lowered their earnings forecasts for the next 12 months. Previously, due to uncertainties surrounding Fed rate cuts, weakness in major Asian economies, and issues with US fiscal policy, executives presented a mixed outlook or were unwilling to provide guidance. Even before Trump won the presidential election, profit revisions for the S&P 500 index had been hovering around neutral levels for the past few months. Morgan Stanley strategist Mike Wilson wrote in a report to clients that companies were "uncertain about the results of 2024, and unwilling to offer further guidance for 2025". Despite the raised expectations for the third quarter, the profit outlook for the full year of 2025 has remained almost unchanged. According to BI's compiled data, Wall Street expects earnings per share for S&P 500 index companies next year to be around $274, slightly lower than the initial forecast of $277 a year ago. Matt Lloyd, Chief Investment Strategist at Advisors Asset Management, stated, "As the new year approaches, you often see a tendency towards more realistic expectations. Coupled with the Fed's comments about not seeing a clear path to rate cuts, negative factors become more realistic." Since mid-October, analysts have downgraded their annual forecasts for energy and materials companies due to the sharp drop in oil prices. Excluding the energy sector, which has distorted expectations with falling commodity prices and weakening inflation, earnings for the component stocks of the S&P 500 index are estimated to grow by around 11% in the third quarter. Overall, by 2025, it is expected that the annual profit growth rate for the component stocks of the S&P 500 index will reach 15%, higher than the 8% projected for this year. However, the issue lies in the fact that although the profit downturn that ended last year lasted a long time, it was relatively shallow, which may open a smaller door of hope for profit expansion compared to bullish expectations for the stock market in the coming years. BI's compiled data shows that, from peak to trough, looking at the past 12 months, earnings per share for the S&P 500 index shrank by 13% in the three consecutive quarters of earnings decline. This is far lower than the median decline of 26% since the late 1960s. Companies will need to announce robust earnings growth for the upcoming year to maintain and demonstrate that high valuations are justified. In recent months, high valuations have driven the S&P 500 index to break the 6000-point milestone. The index is valued at 22 times expected earnings for the next 12 months, far above the long-term average of 18.4 times over the past decade. Adam Phillips, Managing Director of Portfolio Strategy at EP Wealth Advisors, said, "In the coming quarters, reduced expectations for rate cuts may put pressure on already high earnings expectations."