US stock executives have mixed expectations for the future, and there are also many companies unwilling to provide future profit guidance.

However, behind the sharp rise in US stocks, a rarely noticed ominous sign is gradually emerging: Wall Street analysts are rapidly lowering their expectations for next year's profit growth of American companies, which may soon put the brakes on the recent strong rally in the US stock market.

US stocks' profit outlook for next year is deteriorating rapidly.

According to Bloomberg compiled data, a key indicator called the 'earnings revision trend' - measuring the up and down changes in the future 12-month earnings expectations per share of the S&P 500 index - has fallen to negative values and hovers near the second lowest level of the past year. This indicates that Wall Street analysts are concerned about the profit prospects of US companies over the next year.

For most of the past 10 years, corporate profits have been the cornerstone of the rise in US stocks. However, the deteriorating profit growth outlook may weaken the further upward momentum of US stocks.

From the beginning of this year to date, the S&P 500 index has already risen by more than 20%, but this has also led to risks such as overvaluation in the US stock market and an overly concentrated position in large technology stocks.

Bloomberg Intelligence's Chief Stock Strategist Gina Martin Adams said, "US stocks are 'preparing for a reversal ... The big question for 2025 is whether the Fed can continue its policy easing and whether the profit trend favors companies other than large technology companies.'"

Company executives feel uncertain about the future.

In the current third quarter of the US stock market, according to BI's data, analysts still expect the components of the S&P 500 index to deliver excellent financial reports, achieving the fifth consecutive quarter of profit growth, reaching the second-best profit growth performance since early 2022.

Currently, about 90% of the components of the S&P 500 index have already announced their third-quarter performance. From the reported financial statements, it is expected that the third-quarter profits of the S&P 500 index components will increase by 8.5% compared to the same period last year, doubling the analysts' initial expectation of 4.2% at the beginning of this financial quarter.

Despite this, Wall Street analysts have lowered the earnings per share expectations for the next 12 months. This is because company executives have mixed expectations about the future, and many companies are reluctant to provide future profit guidance in the face of uncertainty in the Fed rate cuts and US fiscal policies.

In fact, even in the months leading up to the current presidential election, the momentum of 'earnings revisions' in the S&P 500 index has been hovering around neutral levels. Morgan Stanley strategist Mike Wilson and others wrote in a client report that US companies are uncertain about the results of 2024 and are unwilling to provide further guidance for 2025.

Warning signs are getting closer.

Although Wall Street analysts have raised their expectations for the third financial quarter, the full-year profit outlook for 2025 has hardly changed. According to data compiled by BI, Wall Street expects an earnings per share of around $274 for the S&P 500 index components next year, slightly lower than the approximately $277 estimated a year ago.

Matt Lloyd, Chief Investment Strategist at Advisors Asset Management, said: "As the new year approaches, we often see people tend to have more realistic expectations." "Combined with recent statements from the Federal Reserve indicating no clear rate cut path, the unfavorable factors become more real."

From the perspective of global sectors, the energy industry may be the most pessimistic sector in terms of profit prospects. BI data shows that since mid-October, due to the sharp drop in crude oil prices, analysts have lowered their annual profit forecasts for energy and commodity companies. Excluding the energy sector, components of the s&p 500 index are expected to grow by about 11% year-on-year in the third quarter.

US companies need to disclose strong profit growth performance and future guidance to maintain and demonstrate that high valuations are justified. Over the past few months, as the s&p 500 index broke through the 6000-point mark, the index's valuation has already reached 22 times the expected earnings in the next 12 months, far higher than the long-term average of 18.4 times over the past 10 years.

Adam Phillips, Managing Director of EP Wealth Advisors' investment portfolio strategy, said, "In the next few quarters, if the Federal Reserve reduces the rate of interest cuts, it may bring more pressure to already high profit expectations."

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