What stands out on the earnings stats
Earnings sentiment staged a partial comeback last week as upward EPS estimate revisions for the S&P 500 moved up slightly but remained below its August high. Reporting season remains strong from the perspective of beat rates. What's interesting is the chart on 3Q25 bottom-up consensus operating margin expectations for the S&P 500. This stat came down meaningfully in late October, with tech as the main sector bucking the trend and showing improvement. Deterioration in margin expectations has been masked by strong beat rates, but is likely a contributor to the sour mood seen this reporting season.
Consensus forecasts expect small cap net income growth to peak in 2026. Bottom-up consensus for the Russell 2000 still expects higher growth than the S&P 500 in coming quarters, but the data now shows deceleration in net income growth in final quarters of 2026. Overall, earnings continue to provide a solid foundation for the US equity market, and earnings sentiment improved last week for the second week in a row. But that improvement wasn't enough to challenge the notion that earnings sentiment peaked over the summer.
Color from last week's earnings calls
Most key themes from earnings calls remained intact last week. On the macro, commentary continues to be mixed, with the best tone from tech and healthcare. On the consumer, companies described consumers as stressed, soft, and cautious yet resilient, with disproportionate stress on lower income, subdued DIY market, and weakness in younger cohorts.
On tariffs, companies highlighted the complicated and dynamic trade backdrop, the uncertainty it has created, and some optimism conditions may improve or settle. Companies are managing through with price increases, supply chain adjustments, and shifts in production.
Quick thoughts on small caps and the shutdown
We found that the high-earnings-quality cohort looks reasonably valued (though not cheap) on a median forward P/E (in line with the historical average) but less appealing on sales-based multiples.
On the shutdown, stocks ended last week on a positive note as expectations the government shutdown would end soon picked up. That optimism dissipated on Saturday but returned on Sunday amid new headlines. In the very near term, an end to the shutdown would be beneficial to the stock market as it did appear to be a contributing factor to indigestion the market experienced. But we don't think it will solve all the stock market's problems as issues like stretched valuations, the peak in earnings sentiment, and AI jitters remain.
