As strategists warn that corporate profit growth may have already peaked, equity investors are handing out some of the harshest penalties on record to companies that miss earnings expectations.
Amazon shares plunged on Friday, becoming the latest company to suffer a brutal selloff after releasing its financial results. Earlier, disappointing results from Google parent Alphabet sent its stock down by a record margin on Thursday.
Now, when communication services stocks miss expectations, the resulting selloff is the largest since data collection on the sector began in 2019. The heavily weighted technology sector has seen the same pattern.
Chris Zaccarelli, chief investment officer at Northlight Asset Management, said the market is "much more sensitive than usual," adding that investors would rather sell first and ask questions later than get stuck holding losses.
Strategists from Wells Fargo to Franklin Templeton have predicted in recent weeks that earnings growth for S&P 500 constituents will slow as rising interest rates, trade tax pressures, and high oil prices weigh on results. With about one-third of earnings season completed, their forecasts have been confirmed: data shows profit growth has slowed to roughly 26%, which, while still high compared to historical levels, is below the 32% recorded in the second quarter.
The earnings slowdown is being led by the market's largest sectors. Industry research data shows that third-quarter profit growth for the technology sector is expected to slow to 65% from nearly 77% in the previous quarter. Similarly, profit growth for the communication services sector is projected to drop from nearly 10% to just 3.2%.
Post-earnings stock plunges are amplifying market concerns that the best period may already be over, especially for AI-related companies. Keith Lerner, chief investment officer and chief market strategist at Truist Advisory Services, said: "If these two sectors account for 50% of the market, people will demand more, they want more evidence that this trade still holds." He said slowing growth poses a challenge to that narrative.
In fact, technology and communication services are the only two sectors to decline this month, while all other sectors in the market have posted gains. Kimberly Forrest, chief investment officer at Bokeh Capital Partners, said investors are trimming "some of the excessive gains" that technology stocks had previously accumulated and rotating into cheaper stocks in other areas, rather than exiting the market entirely.
Even with slowing growth, overall market earnings are still expected to continue rising. According to industry research estimates, S&P 500 earnings growth is expected to approach 20% through 2027 and into the first quarter of 2028. Jeff Schulze, chief investment strategist at the Franklin Templeton Institute, said this is above the 10% threshold historically needed for stocks to keep rising after earnings growth peaks.
"More important than peak earnings is how much earnings grow in the year after the peak," Schulze said. Given the current outlook, he said, "if we can meet the 2028 earnings expectations, then the S&P 500 could deliver high single-digit to low double-digit returns in 2027."
However, for investors, the issue is not simply slowing earnings growth. So far, the proportion of S&P 500 companies beating Wall Street expectations is the lowest this year, with technology, consumer discretionary, and financials among the sectors affected. Investors are certainly not letting companies that miss estimates off easily. "If earnings come in below expectations in one specific area, I think you'll see rapid repricing across all related areas," Zaccarelli said.
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