Behind the continuous new highs of the US stock market: Earnings expectations are being revised upward at the fastest pace in four years

According to Zhitong Finance APP, it's no wonder that the S&P 500 index keeps hitting new highs: analysts are raising their earnings expectations for this quarter at the fastest pace in nearly four years. An index from Citigroup that tracks the relative number of upward and downward revisions to U.S. stock earnings per share expectations has risen to its highest level since December 2021. Companies that have recently released their own guidance are also showing the same strong trend. Data from Bloomberg Intelligence indicates that a forward guidance indicator comparing corporate guidance with Wall Street consensus expectations is hovering near its second-highest level in nearly four years.

This more optimistic outlook stands in stark contrast to the beginning of the year when concerns over U.S. President Donald Trump's trade policies peaked, causing corporate guidance indicators to drop to their lowest point in a decade.

However, U.S. companies may still need a few months to begin feeling the full impact of Trump's trade war on their supply chains and profit margins.

Yung-Yu Ma, Chief Investment Strategist at PNC Asset Management Group, stated, "A few months ago, analysts lowered their earnings expectations due to tariff issues. Now, people are more convinced that tariffs will not have the devastating impact on the economy that was previously feared. But the question is, everyone is waiting for the impact of tariff policies in the coming months."

The upward momentum in U.S. corporate earnings expectations has reached its peak since 2021.

This may explain why the full-year expectations have not fully recovered to previous levels. Analysts' earnings forecasts indicate that the growth rate for the full year of 2025 will be 9.2%, down from nearly 13% at the beginning of the year. Data compiled by Bloomberg Intelligence shows that Wall Street expects S&P 500 constituent companies to have earnings per share of about $269 in 2025, down from the initial forecast of $273 and lower than the $279 forecast from a year ago.

Moreover, the trend of upward revisions in earnings forecasts cannot guarantee that it will continue. Nick Giacoumakis, President of NEIRG Wealth Management, stated that sell-side analysts and companies may lower their forecasts in the coming months.

This situation also occurred during Trump's first term: although trade disputes had intensified by early 2018, the impact on corporate profits did not become apparent until about a year later. Giacoumakis noted that during this period, the U.S. economy benefited from large-scale corporate tax cuts.

This time, the latest large-scale tax cut advocated by Trump has also alleviated concerns about the economic impact of his trade policies. However, Bloomberg Intelligence believes that the tax cuts for S&P 500 constituent companies may only be about half of those from the 2017 tax plan David Kostin of Goldman Sachs stated last Friday that he expects the strong trend of analyst earnings revisions to "weaken in the future," adding that "the anticipated margin expansion seems unrealistic."

Wendy Soong, a senior analyst at Bloomberg Intelligence, indicated that analysts are unlikely to hastily adjust their forecasts for the second half of the year before more companies release their earnings projections for the upcoming quarters.

Nevertheless, the current earnings season is undoubtedly showing strong trends. Among the S&P 500 constituents, only 25% of companies have issued quarterly earnings guidance, with these companies typically being concentrated in technology and consumer discretionary sectors. So far, about 90 companies have announced their earnings per share expectations for the third quarter, and Bloomberg Intelligence believes that the momentum reflected in these guidance is the strongest since the last three months of 2024. Among the 64 companies that have provided third-quarter revenue guidance, the growth momentum is the strongest since the second quarter of 2021.

This week, major U.S. retailers such as Walmart (WMT.US) and Target (TGT.US) will release their earnings reports, and traders will closely monitor the performance of U.S. consumers in the early stages of the Trump tariff policy implementation.

In recent years, corporate performance has demonstrated strong resilience, even in the face of various challenges ranging from soaring inflation to the highest interest rates in decades. Many investors now hope that Trump can reduce or eliminate tariffs before they squeeze profits.

However, despite U.S. companies' confidence in their ability to withstand trade storms, Goldman Sachs strategists led by Guillaume Jaisson noted that "cost pressures may increase in the second half of 2025, posing downside risks to real income growth."

Giacoumakis of NEIRG stated, "Most companies are still depleting inventories that were stockpiled before the tariffs took effect, and executives were unclear about how global trade would change at that time. Therefore, we will need a few more quarters to better understand the impact of all this on businesses."