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Posted October 13, 2025 at 9:30 am
Disappointing earnings guidance need not apply for bull market job
Over the next four weeks or so, there is some very good news coming—or at least the stock market is of the belief that very good news is coming. We are referring not only to earnings results for the third quarter but also to the earnings guidance that will be accompanying the reports.
Our assessment of the stock market’s mindset is rooted in a forward 12-month P/E multiple of 23.0x that is a 24% premium to the 10-year average and a 36% premium to the 25-year average.
You don’t get an earnings multiple like that if you think bad news is coming.
Estimates compiled by FactSet show a blended third-quarter earnings growth rate of 8.1% for the S&P 500. That is up from 7.1% at the end of the second quarter. That may not sound like a big change, but it is a big deal because analysts typically lower their earnings estimates during the quarter.
The last time analysts raised their estimates in aggregate during a quarter was the fourth quarter of 2021, according to FactSet. The takeaway is that expectations are high going into this reporting period.
We can understand why. The dollar is weaker; the AI buildout is stronger; capital markets activity is hotter; the tax outlook is brighter; consumer spending in aggregate has been solid; tariff concerns have moderated; and expectations for multiple rate cuts before year-end are prevalent.
The silver lining on this cumulus earnings cloud is that earnings growth is typically two to three percentage points higher than what is expected going into the reporting period. Of course, that is typically off a lower starting base, but that is not the case going into this reporting period.
If S&P 500 companies live up to the historical precedent, good earnings news will indeed be stronger than expected as opposed to stronger than lowered estimates.
The investment banks seem destined to lead off the reporting period on a high note. Much is going their way, including a revival of the IPO market and a stock market at record highs, which are mutually inclusive. The element that will matter most to the market, though, is the commentary on credit quality.
What the banks say there will influence perceptions about the economy and how that translates into earnings growth prospects. Again, everything said during this reporting period, and not just by the banks, will be viewed through the lens of what it means for the earnings growth outlook.
That is the fate of a market trading with a premium valuation. The guidance must be on point, or many points will be taken off stock prices.
It goes without saying, but we will say it anyway: that is especially true for the mega-cap stocks specifically and growth stocks in general. They have been the thoroughbreds pacing the market to record highs.
In fact, the S&P 500 information technology sector is expected to deliver a command earnings performance for the third quarter. Its blended growth rate is 20.8%, according to FactSet. That translates to a 4.58 percentage point contribution—or more than half—to the overall growth rate.
The bulk of the residual is expected to be delivered by the financial sector (2.21 percentage points). The energy, consumer staples, consumer discretionary, and health care sectors are currently expected to detract ever so slightly (i.e., 0.2 percentage points or less) from earnings growth.
The earnings results and guidance shared over the next several weeks will be an influential factor in determining if the stock market has a so-called “melt-up” into year-end or a meltdown. Investors have been treated to one good earnings reporting period after another, in aggregate, for some time.
There is a palpable feeling today that this third-quarter reporting period will be no different. However, if this time is different, it won’t be a good outcome for a stock market that is priced somewhere between needing to be reassured by what it hears and hoping to be positively surprised.
That is what trading at 23x forward 12-month earnings implies. Disappointing earnings guidance need not apply for the job of keeping this bull market going.
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Originally Posted on October 10, 2025 – Disappointing earnings guidance need not apply for bull market job
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