The current bull market marked its fourth anniversary last week, with the S&P 500 gaining approximately 115% since October 2022. Despite persistent inflation, rising bond yields, trade tensions and energy supply disruptions, stocks have delivered impressive returns. However, much of that performance has been concentrated in a relatively small group of companies.
As third-quarter earnings season gains momentum, investors are looking for continued corporate profit growth to support elevated market expectations.
A Strong Bull Market With Narrow Leadership
While the S&P 500 has more than doubled over the past four years, only two of its 11 sectors have outperformed the broader index during that period. This highlights the narrow leadership behind the market's gains, with a handful of companies accounting for a disproportionate share of returns.
Resilient corporate earnings have been a key driver of this performance. With approximately 15% of S&P 500 companies scheduled to report this week, earnings results will provide an important test of whether that strength can continue.
Earnings Expectations Raise the Bar
Third-quarter earnings growth is expected to reach approximately 30% year over year. If realized, that would mark the third consecutive quarter of growth exceeding 25%, well above the roughly 10% to 12% quarterly growth average over the past decade.
Typically, analysts lower earnings estimates ahead of reporting season, making it easier for companies to exceed expectations. This time, estimates have been rising, effectively raising the bar.
With valuations elevated and economic uncertainties persisting, companies may have less room for disappointment if their results fall short.
Technology and AI Continue to Drive Growth
Earnings growth remains heavily concentrated in technology and artificial intelligence-related companies, which are expected to account for approximately two-thirds of the S&P 500's overall earnings growth this quarter.
Just two companies, Micron and Nvidia, are expected to contribute roughly one-third of that growth.
This concentration underscores the market's continued dependence on a relatively small number of companies to deliver strong results and sustain investor confidence.
Meta's Earnings in Focus
With a relatively light economic calendar and Federal Reserve officials observing their customary blackout period ahead of the upcoming FOMC meeting, corporate earnings will dominate investor attention this week.
One closely watched report will come from Meta on Wednesday, October 21.
As one of the major companies investing heavily in artificial intelligence infrastructure, Meta's results and capital expenditure outlook may provide insight into whether spending on AI continues at its current pace.
Investors will also be looking for increasing evidence that substantial investments in AI infrastructure are beginning to generate measurable returns.
The Bottom Line
Four years into the current bull market, corporate earnings remain a critical source of support for stocks. Expectations for continued profit growth are exceptionally high, but leadership remains concentrated in a handful of technology and AI-related companies.
This earnings season will help determine whether those companies can continue delivering the results needed to sustain market momentum.
Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA®), a CERTIFIED FINANCIAL PLANNER™ (CFP®), and has been included on the Forbes NextGen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio.
EP Wealth Advisors offers a comprehensive range of services to help you invest with greater insight, as well as develop a holistic wealth management strategy. To discuss your finances and investment goals, we invite you to contact one of our advisors.
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Video Transcript:
Adam Phillips:
All right, a little change of scenery for me this week. I'm coming to you from New Orleans, Louisiana. I'm here for work for a couple of days but wanted to provide you with a quick market update. Now, before I do that, I thought it was important to acknowledge the fact that I missed an anniversary last week.
Now, fortunately, it was not the anniversary that I share with my wife. It was the anniversary of the current bull market in stocks. So last week, the S&P 500 celebrated its four-year anniversary of the current bull market which began in October of 2022. Since that time, the broad market is up about 115%.
Really strong performance when you consider the fact that investors have had to grapple with inflationary pressures, rising bond yields, a trade war, two energy pr- uh, supply shocks, one of which we're living through right now, and the list goes on. So really strong performance. But as always, I think it's important to look underneath the hood and understand where returns are coming from.
And here, I think it's important to highlight the fact that just 2 out of the 11 sectors of the S&P 500 have outperformed that broad index return over these last four years. Now, that really speaks to the fact that leadership has been extremely narrow these last few years, and I think we know that, but, uh, just the fact that 9 out of 11 sectors have underperformed the, the broad benchmark really speaks to the fact that there's only a handful of names that have really seen returns on that level But as we take a step back, let's just acknowledge the fact that these last several years have been very, very strong despite the headwinds.
And what's been the main driver of that? I, I think, uh, at the end of the day, a lot of it comes back to fundamentals, and specifically earnings growth. Earnings have been incredibly resilient here in these last few years, and that's why this current period that we're in is so important for investors. Last week, the third quarter earnings season kicked off for the S&P 500, and this week it continues.
There's about 15% of companies in the S&P 500 that are reporting earnings this week alone, so very important time for us. And as we look at the expectations around this earnings season, they are extremely high. We're looking at expectations of 30% earnings growth on a year-over-year basis. If this happens, this will be the third straight quarter that earnings growth comes in above 25%, so really strong profit growth across these companies.
And just to put additional context around that, over these last 10 years, the average quarterly earnings growth that we're used to seeing is clo- around 10 to 12%, so we're looking at earnings growth that is more than double. That really speaks to how strong earnings are in this current environment. But a couple more things to highlight.
Number one, one of the trends that we're used to seeing in the lead-up to earnings is expectations get revised lower before earnings season actually kicks off, so in the, in those weeks preceding the earnings season. And what that does is effectively lowers the bars for these companies, and that's why we te- we typically see really strong beat rates.
These bars are lowered and, and earnings season goes pretty well. We've seen that trend at, in recent years. What was interesting about this most recent earnings season and the one that we're currently entering, is the fact that expectations have actually been on the rise. And what that does is it's actually raising the bar for these companies, and I think what it's doing here, especially at these valuations and, and considering the other risks around us, is it means that companies are really going to be on the hook and need to deliver, uh, and hit on these expectations because the market could be setting itself up for disappointment.
So that's what we're really looking to see right now. I think the other thing that we're keeping an eye on this earnings season is the fact that just like the market returns over these last few years, earnings growth is incredibly narrow. This earnings season, we are looking at about two-thirds of earnings growth that's expected to come from technology and AI-related companies.
So it's still very, very narrow and it, and it's dominated and focused in that AI theme The other thing I would point out is that even though earnings growth as a whole is expected to come in very, very strong, just two companies, Micron and Nvidia, are expected to account for about one-third of total earnings growth.
So this is something to keep an eye on. It really speaks to the fact that there's just a handful of names that are really leading the charge here, and whether we like it or not, we need to root for these names to continue to deliver because they are really supporting not just the markets, but the e- but the economy as well.
And that gets me to just the last point I will make and what we're watching this week. It's a really light week when it comes to data, and we're, we're in this current blackout period, so we're not gonna hear a lot of Fed speak and Fed officials speak. They go into this blackout period ahead of the FOMC meeting that's coming at the end of the month.
So this week it's not about economic data. It's not about anything that Fed officials are going to say. It's about earnings, and one key, uh, earnings report in particular that I'm focused on, and that's Meta, formerly known as Facebook. They report on Wednesday, October 21st. They're going to give us the first glimpse into, uh, into the AI theme, how it's going, what the capital expenditure plans are.
AI-- uh, excuse me, Meta has been one of the, uh, the, the big spenders, those hyperscalers that's continued to drive the, the narrative around AI. Uh, so this is gonna be really interesting to see if they're continuing these, these CapEx plans, the, the plans for spending, because ultimately, that's something that the market has grown to rely on.
And at some point, and potentially this quarter, we've been saying that for a while, we're going to be looking for more and more evidence that all of this money that's going into the build-out for artificial intelligence is starting to pay off. So this will increasingly come into focus, but so far this week it's gonna be all about Meta.
I'll leave it there for right now, but, uh, thanks for joining me here while I'm on the road. I'll look forward to seeing you next week.
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