### S&P 500 Profit Forecasts Signal Potential Stock Market Setback

Wall Street analysts are rapidly revising down their projections for the earnings growth of Corporate America over the next year, posing a potential threat to the ongoing stock market rally. This shift is evident in the earnings-revision momentum, a crucial metric that measures changes in expected per-share earnings for the S&P 500 over the next 12 months. According to Bloomberg Intelligence, this indicator has dipped into negative territory, recording its second-worst reading of the past year.

Corporate earnings have been a fundamental driver of the stock market's ascent over the past decade. However, a diminishing outlook for profit growth could hinder further advancements for the S&P 500, especially after this year's gains have pushed valuations to stretched levels. The benchmark index has surged more than 20% this year and is at its priciest since April 2021.

Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, warns that stocks are being "set up for a reversal." She emphasized that the major issues for 2025 revolve around the Federal Reserve's policy decisions and whether earnings momentum could shift beyond Big Tech to other sectors.

Despite a general downturn in earnings outlooks, the S&P 500 is still expected to post its second-best profit growth since early 2022 for the third quarter. With nearly 90% of companies having reported, projections indicate an 8.5% profit increase through September compared to last year, substantially higher than the initial 4.2% estimate at the beginning of the earnings season.

Though the trend shows a fifth consecutive quarter of profit growth, executives have been cautious in their future guidance due to uncertainties surrounding Federal Reserve interest rate cuts, China's economic challenges, and fiscal policy ambiguities in Washington. These mixed signals have led analysts to lower earnings per share (EPS) estimates for the next 12 months.

Prior to recent developments, earnings-revision breadth for the S&P 500 had been near neutral for several months. The earnings forecast for 2025 has shown little change, with Wall Street estimating S&P 500 companies to earn around $274 per share, slightly lower than previous projections of $277.

Matt Lloyd, chief investment strategist at Advisors Asset Management, noted that as the new year approaches, expectations tend to become more realistic. He added that the Federal Reserve's comments about the uncertain path for rate cuts make these challenges more tangible.

Particularly hard-hit have been sectors like energy and materials, with analysts lowering future earnings projections amid declining crude prices. Even excluding the energy sector, the S&P 500 is expected to see an 11% year-over-year profit growth in the third quarter.

For the full year of 2025, overall S&P 500 profit growth is anticipated to climb 15% annually, a significant rise from the 8% estimated for this year. However, the earnings recession that the index experienced last year, while relatively mild, might limit future profit expansions. The S&P 500 saw a 13% EPS contraction during its recent three-quarter earnings recession, less severe than the historical median peak-to-trough drop of 26% since the late 1960s.

To maintain and justify the high valuations that have propelled the S&P 500 above the 6,000 mark in recent months, companies will need robust profit growth and solid future outlooks. With the index currently valued at 22 times future 12-month earnings estimates, much higher than its decade-long average of 18.4, fewer rate cuts could exert pressure on these elevated earnings expectations in the near term, according to Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors.