Fading earnings sentiment
This reporting season is shaping up to be a critical one. Despite a recent Federal Reserve rate cut and expectations for further easing, the S&P 500 has seen no valuation expansion. Forward price-to-earnings (P/E) ratios have failed to reach new highs since August, even as the index continued to climb in price until late last week. Earnings sentiment has notably weakened since the last reporting season, with the rate of upward EPS estimate revisions for the S&P 500 retreating to 53.6% in the latest update.
Mixed macro signals from late-September/early-October earnings reports
Recent earnings calls have presented a mixed macroeconomic picture. On the positive side, one company highlighted that small businesses are expected to remain resilient due to the passage of the tax bill and recent rate cuts. Strong travel demand was also noted by companies in the air travel and cruising industries. However, challenges remain, particularly in the consumer space. One company emphasized the need to optimize headcount, while another reported soft volumes among larger customers. Several firms highlighted value-seeking and selective behavior among consumers, with low- and middle-income groups facing significant challenges. Broader concerns included global socioeconomic stress, higher-than-expected inflation, and rising commodity costs. On tariffs, companies reported worse-than-expected impacts, further compounding economic uncertainty.
Market weakness and Friday’s price action
While the stock market outlook remains constructive over the next 12 months, with a 7,100 S&P 500 target for the second half of 2026, near-term risks are mounting. A period of consolidation or a “garden variety” pullback of 5-10% in the S&P 500 appears increasingly likely. Factors contributing to this outlook include stretched valuations, seasonal pressures, fading earnings revisions, and a recent reversal in net bullish sentiment from the AAII survey (which had declined in August and early September before recovering).
