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The S&P 500 has rallied 11% year-to-date, and Wall Street is officially out of patience. As the third-quarter earnings season begins, traders expect Corporate America to prove that the rally is justified.
According to Bloomberg Intelligence, analysts are projecting 7.4% profit growth for U.S. companies this quarter, up slightly since mid-August, while the MSCI All-Country World Index is also heading toward an all-time high. The surge, driven by the AI investment boom, has inflated valuations and expectations alike.
But that optimism is running into headwinds. The S&P 500 has soared 32% from its April low, yet tensions over tariffs, worries about a tech bubble, and a still-fractured global trade system are weighing on confidence. Sam Stovall, chief investment strategist at CFRA, said:
“Investors will be very unforgiving of any kind of slip, whether it’s a slip in earnings or a slip of the tongue when talking about expectations.”
The pressure now shifts to the nation’s biggest players as JPMorgan Chase & Co. and other top banks kick off results next week, followed later by the megacap tech giants whose gains have powered most of this rally.
Trump’s tariffs hammer stock profits – Investors demand clarity from companies
Trade is once again the story of the season. President Donald Trump announced plans for a new 100% tariff on Chinese goods, plus export controls on “any and all critical software,” to begin November 1.
The decision hit markets immediately, with analysts warning that months of elevated tariffs are already cutting into corporate profits. Deutsche Bank AG estimates that S&P 500 earnings growth would have been about one percentage point higher this quarter without those tariffs.
Asian exporters, who shipped $1.3 trillion in goods to the U.S. last year, have so far weathered the hikes, though many fund managers think that’s due to front-loaded exports before tariffs fully take effect. In Europe, earnings expectations are already being trimmed.
A Citigroup index shows estimates have been falling steadily since mid-March, lowering the bar for upcoming reports. At the same time, the AI spending boom hasn’t slowed. UBS forecasts a 67% jump in global capital expenditures this year to $375 billion, with Societe Generale noting that the capex-to-sales ratio is at a 25-year high.
But any hint of a slowdown could shake investor confidence. Mike O’Rourke, chief market strategist at JonesTrading, said, “A slowdown would be like slamming on the brakes. A lot of names would enter a real profit-taking mode.”
Layoffs, currency swings, and China’s weak growth add pressure
With the federal government shutdown blocking new employment data, investors are watching earnings calls for signs of workforce cuts. Ross Mayfield, strategist at Robert W. Baird & Co., warned that layoffs could expose deeper weakness in the labor market and weigh on consumer spending.
“If you see enough of those start to stack up,” he said, “it’s a signal the labor market is weaker than expected.”
Currency trends are also shaping Q3 results. The U.S. dollar rallied against major currencies but remains well below its 2022 peak. That’s a relief for exporters and multinationals converting foreign income into dollars.
Jeff Buchbinder, chief equity strategist at LPL Financial, said the softer dollar, along with AI-driven capital investment, could add “another 5–7% upside” to profit forecasts and lift earnings at a low-teens pace this quarter.
In Europe, the stronger euro remains a drag. Susana Cruz, strategist at Panmure Liberum, said the recent dip came too late to benefit Q3 reports, especially for construction, healthcare, and technology firms that generate nearly 60% of sales abroad.
Meanwhile, China’s CSI 300 index is up 17% this year, but its Q3 profit outlook is flat, with just 3% growth expected. The upcoming meeting between Trump and Xi Jinping is now uncertain, as both countries tighten restrictions on tech and material flows.
Still, there’s a glimmer of improvement. Goldman Sachs believes China’s corporate downgrades are slowing as factory activity and industrial profits rebound. Some analysts also pointed to Beijing’s efforts to tackle involution, the destructive domestic price wars that have plagued competition.
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