Quarterly Outlook
Q3 Investor Outlook: Beyond American shores – why diversification is your strongest ally
Jacob Falkencrone
Global Head of Investment Strategy
Investor Content Strategist
The second quarter was very volatile for stock markets – will this be reflected in the Q2 earnings report cards? Banks kick off earnings season on Wall Street on 15 July, the same as key US inflation data is released, with the market near all-time highs despite trade tensions and fears about declining earnings growth.
Multiples have also looked stretched following the rally, with the S&P 500 trading at 22x forward earnings. Notably, cyclicals are trading higher relative to defensives, with the expectation that growth is about to pick up. But bond and equity markets are not telling the same story - one will have to give - either we have stronger growth and higher yields or lower growth and yields and stocks ought to fall.
Tariff Quarter
This is the first quarter for US companies under President Trump’s tariff regime. While earnings are seen declining from the first three months of the year, a plunge in the US dollar will offset some of the damage. The dollar is down about 10% YTD after enduring its worst first half since 1973. Analysts expect second-quarter EPS growth of 5.8% compared with 13.7% in Q1. For the S&P 500, EPS growth is expected at 5% for the index as a whole, which would be the slowest pace of growth since Q4 2023.
Earnings season also comes as Trump ratchets up some tariff noise, potentially adding to the volatility and uncertainty for certain stocks and sectors. Having extended the timescales for agreeing trade deals again the new deadline of 1 August comes right in the middle of the Q2 reporting season.
Meanwhile, the next Federal Reserve policy meeting is scheduled for 29-30 July, ensuring there will be plenty of macro noise around the big earnings releases. A critical US jobs report follows on 1 August. Before this, US inflation data coincides with the start of earnings season proper when the banks begin reporting on Tuesday, 15 July. This could be a crucial reading ahead of the Fed meeting on whether policymakers are leaning towards the kind of cuts the market is hoping for or whether rising inflation pressures from tariffs are starting to show.
Low Bar to Clear
Earnings estimates have been revised down more than normal, potentially clearing the way for companies to beat Wall Street’s expectations. During the quarter, analysts lowered EPS estimates by a larger margin compared to the three most recent averages, according to FactSet. The Q2 bottom-up EPS estimate decreased by 4.2% to $62.83 from $65.55 between March and the end of June.
Expectations look sufficiently low for companies to deliver healthy beats on revenues and profits, so the question will turn to the outlook and earnings estimates. Again the bar seems quite low.
Analysts have also lowered FY 2025 estimates. It is worth noting that analysts usually lower reduce earnings estimates for the year during the first six months of the year, but the 3.6% revision lower is well ahead of the average 2.8% cut over the last 25 years.
Big Names Key
For the broader market, the big tech names will have to deliver. Increasingly the focus has narrowed down from the Mag7 to the Mag3 – Nvidia, Meta and Microsoft, which have been doing the heavy lifting for the broader market and account for nearly 20% of the market cap of the S&P 500. Of extra importance will be guidance from tech companies, especially Amazon, Meta, Microsoft and Google, on their AI buildout spending, on which a lot of the market expansion is dependent.
Technology shares rallied over 23% in the second quarter and earnings for this sector are seen rising 17%. Communication Services, which also rose in Q2, is seen posting EPS growth of more than 30%.
Where Next for the S&P 500?
Wall Street has turned bullish on US stocks - Goldman Sachs has joined JPMorgan, Barclays, Citigroup and Deutsche in raising year-end forecasts for the S&P 500, suggesting it could rally 11% from last week’s record highs.
Industry analysts in aggregate predict the S&P 500 will rise about 7% over the next 12 months, according to FactSet, with the bottom-up target price for the broad index at 6,694.55.
Key Earnings Dates for Your Diary (correct as of 11 July)
Stocks | Earnings Date |
JPMorgan Chase & Co. | 15-Jul |
Goldman Sachs | 16-Jul |
Netflix Inc. | 17-Jul |
Taiwan Semiconductor (TSMC) - ADR | 17-Jul |
Tesla Inc. | 23-Jul |
Intel Corp. | 24-Jul |
Alphabet Inc | 29-Jul |
Advanced Micro Devices Inc. | 29-Jul |
Microsoft Corp. | 29-Jul |
MicroStrategy | 29-Jul |
UnitedHealth Group Inc. | 29-Jul |
Meta Platforms Inc. | 30-Jul |
Robinhood Markets Inc. | 30-Jul |
Apple Inc. | 31-Jul |
Palantir Technologies Inc | 4-Aug |
Hims & Hers Health Inc. | 4-Aug |
Super Micro Computer Inc. | 5-Aug |
Uber Technologies Inc. | 6-Aug |
IonQ Inc. | 6-Aug |
Amazon.com Inc. | 7-Aug |
Coinbase Global Inc | 7-Aug |
CoreWeave Inc. | 13-Aug |
Rigetti Computing, Inc. | 14-Aug |
D-Wave Quantum Inc. | 14-Aug |
Berkshire Hathaway Inc. B | 15-Aug |
NVIDIA Corp. | 27-Aug |
Broadcom Inc. | 4-Sep |
Source: nasdaq.com, company websites