Wall Street Expects Too Little of Q3 Earnings, Goldman Says. What Could That Mean for Stocks?

Core Viewpoint - Wall Street is underestimating the strength of the economy and setting low expectations for S&P 500 earnings growth, which is projected to slow to 6% in Q3 from 11% in Q2, but Goldman Sachs anticipates earnings growth will exceed these forecasts due to stronger sales and positive surprises from the "Magnificent 7" tech stocks [2][3][10]. Earnings Growth Expectations - Analysts predict that S&P 500 earnings growth will be lower than expected, with a consensus of 6% growth for Q3, down from 11% in Q2 [2][10]. - Goldman Sachs analysts believe that earnings growth will surpass this forecast, driven by stronger sales growth and the performance of the Magnificent 7 [3][5]. Economic Indicators - Goldman economists estimate that GDP grew by 2% in Q3, consistent with Q2 growth, despite Wall Street's conservative view of real sales growth slowing to 1% from 2.5% [5]. - The stabilization of the U.S. dollar in Q3 may have impacted sales growth, as the dollar's decline in the first half of the year had previously boosted international sales for S&P 500 companies [6]. Performance of the Magnificent 7 - The Magnificent 7, a group of major tech companies, is expected to drive earnings growth, although analysts forecast their earnings growth to be half as fast in Q3 compared to Q2 [7]. - Historically, the Magnificent 7 has exceeded expectations, suggesting potential for positive surprises in the current earnings season [7]. Analyst Sentiment - For the first time since Q4 2021, analysts have raised their S&P 500 earnings per share estimates by 0.1% during Q3, indicating increased confidence in earnings [9][10]. - Despite the overall optimism, Kostin warns that expectations for earnings revisions may be more modest this quarter due to a lack of significant changes in the economic outlook [11]. Tariff Impact - Tariffs are expected to pose a greater challenge for earnings this quarter, with customs duties totaling $93 billion, a 33% increase from Q2 [12]. - Corporate profit margins are likely to remain stable due to strategies like supplier changes and cost cuts, but substantial margin expansion in Q3 appears unlikely [12].