High Valuations Elevate Risks Amid Typical Q4 Forecast Declines
As year-end approaches, Wall Street analysts are engaging in a familiar practice: trimming their profit forecasts for the coming calendar year. By mid-November, expectations for S&P 500 earnings in 2025 had dropped to $274.96 per share, down from $279.68 in June and $276.66 in late September, according to FactSet data.
While these downgrades are routine during the fourth quarter, this year’s pace is slightly accelerated. FactSet’s John Butters notes that forecasts have declined by 0.6% since the quarter began, a rate consistent with the 15-year average for Q4 but marginally faster than recent five-year trends.
Normally, investors largely overlook these adjustments, preferring to wait for actual earnings reports. However, with the S&P 500 trading at a steep 22 times forward earnings, even modest declines in expectations could weigh heavily on sentiment.
Elevated Stakes Amid Lofty Valuations
“The stakes are higher because valuations are higher,” explains James St. Aubin, CIO at Ocean Park Asset Management. Analysts still foresee a 12% earnings growth rate for 2025, up from 9.4% for 2024, but such optimism could falter if economic challenges persist.
Recent market declines suggest investor anxiety over the Federal Reserve’s cautious approach to interest rate cuts. If shrinking earnings forecasts coincide with higher-for-longer rates, markets could face a tough stretch, according to analysts like Josh Emanuel, CIO at Wilshire.
Broadening Earnings Growth Faces Hurdles
One of the more concerning trends is the tempering of expectations for sectors beyond technology. While Big Tech, led by companies like Nvidia, has sustained overall growth, downward revisions in healthcare, consumer staples, and energy indicate a narrowing foundation for earnings expansion.
Meanwhile, small-cap stocks, which had shown signs of a rebound, are also facing revised expectations, undercutting hopes for a broader market recovery.
Risks Beyond the Earnings Outlook
Policy uncertainty further complicates the picture. While corporate tax cuts or deregulation could boost profitability, potential trade disputes or tariffs under a Trump administration may harm large-cap companies, which derive significant revenue internationally.
“The rhetoric around trade wars could translate into real risks for multinational corporations,” St. Aubin cautions.
A Market at a Crossroads
As earnings revisions continue, the potential for smaller-than-expected profit growth could intensify pressure on equities. While some analysts remain optimistic about 2025, the combination of high valuations, macroeconomic uncertainty, and shifting sector dynamics poses significant challenges for markets heading into the new year.
