U.S. companies' robust profit growth this quarter, coupled with expectations that the trend will continue, has provided strong support for investors betting on the stock market rally. A team led by Deutsche Bank strategists Binky Chadha and Parag Thatte noted in a report that as of November 4, third-quarter earnings are projected to grow 13.6% year-over-year, nearing a two-year high. They added that seasonally adjusted sequential growth could reach 6.5%, ranking among the highest levels in the past 15 years, with momentum extending into the fourth quarter.
"In the Q4 earnings cycle, either estimates will be revised upward or companies will significantly outperform expectations," Thatte said in an interview. He pointed out that the fourth quarter typically performs strongly due to holiday consumption and tech procurement demand. Deutsche Bank expects year-over-year earnings growth of 14% for the quarter.
Thatte attributed the growth momentum to improving demand in AI, power, aerospace, and defense sectors, alongside cost reductions and price hikes by many companies. He believes the stock market still has room to rise, especially as earnings climb and household cash remains abundant, while investor positioning stays relatively neutral. Deutsche Bank set a year-end target of 7000 for the S&P 500, about 4% above last Friday's close, implying a 19% gain for 2025.
**Broadening Market Strength** Morgan Stanley’s Michael Wilson also shares Deutsche Bank’s optimism, stating that strong earnings could drive stocks higher into 2026. He noted "clear signs" of an earnings recovery, with U.S. firms enjoying stronger pricing power. Wilson highlighted that earnings revisions have bottomed—meaning the ratio of analyst downgrades to upgrades has hit a trough.
Thatte emphasized that multiple indicators show earnings growth has broadened, which is crucial for sustaining market momentum. Deutsche Bank data reveals more companies achieving double-digit growth, with the number of S&P 500 sectors posting earnings gains rising from just two in Q2 (large-cap growth, tech, and financials) to six.
"Overall growth was decent but largely driven by tech," he said. "That dynamic appears to have shifted." Analyst Wendy Song noted that over 90% of S&P 500 companies (representing 83% of the index’s market cap) have reported Q3 results, with growth exceeding expectations. Excluding the "Magnificent Seven" tech stocks, the remaining 493 constituents delivered "exceptionally strong" earnings growth of 10.84%, double the pre-season forecast of 5.28%. Nearly all sectors, except energy and consumer staples, surpassed year-ago revenue and profit levels.
Jonathan Golub, chief equity strategist at Seaport Global Holdings, observed similar broadening trends. "Tech had a very strong quarter, but non-tech sectors performed even more surprisingly well," he said in a phone interview, noting an increasing number of companies beating earnings estimates.
**Reasons for Caution** However, risks remain. Alternative labor market data during the U.S. government shutdown showed weakness, while some indicators suggest consumer confidence may be deteriorating. Recent corporate defaults have raised concerns about worsening credit quality, with JPMorgan CEO Jamie Dimon warning that "one cockroach" could signal deeper issues.
"While tariff tensions have eased in recent months, clear labor market softness is adding downward pressure to pricing power," wrote Evercore ISI analyst Steve Sakwa.
Consumer-facing sectors lagging is another concern. Deutsche Bank’s Thatte noted declining earnings for consumer staples and discretionary firms, reflecting resistance to higher prices and squeezed margins.
Still, Deutsche Bank maintains an optimistic earnings outlook, citing Q3’s above-average earnings beats. The bank noted that after April’s "Liberation Day" tariff shock led analysts to cut estimates, Q4 consensus expectations rebounded only modestly, setting the stage for "significantly better-than-expected" growth this quarter.
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