The U.S. corporate sector is experiencing a significant surge in earnings, with the growth rate hitting a four-year high despite concerns over the impact of the trade war initiated by President Donald Trump.
Strongest Earnings Growth Rate Since 2021
The median year-on-year earnings growth across the Russell 3000 index, which serves as a benchmark for the entire US stock market, reached 11% in the third quarter. This is a substantial rise from the 6% growth seen in the previous three months, reported the Financial Times on Saturday.
This marks the strongest growth rate since the third quarter of 2021. Despite worries about the trade war's effects, six of the 11 sectors in the S&P 500 posted positive average earnings growth in the three months through September—up from only two sectors, financials and megacap technology, in the previous quarter.
Mixed Reaction To Tariffs
Automaker Ford Motor Co.'s (NYSE:F) CEO, Jim Farley cautioned that the tariffs represent "a $2 billion headwind for Ford," which according to him, "really restricts our future investment." Meanwhile, toy maker, JAKKS Pacific Inc. (NASDAQ:JAKK) saw the impact of Trump’s trade and tariff policies, which are taking a toll on its sales and margins.
On the other hand, General Motors (NYSE:GM) lowered their 2025 gross tariff expectation to $3.5-$4.5 billion, from their previous estimate of $4-$5 billion. Meanwhile, financial sector stocks, JPMorgan Chase & Co. (NYSE:JPM), Goldman Sachs Group Inc. (NYSE:GS), Wells Fargo & Co. (NYSE:WFC), and Citigroup Inc. (NYSE:C) all exceeded Wall Street expectations, indicating persistent strength across lending, trading, and consumer banking.
Dec Mullarkey, managing director at SLC Management, told the Financial Times that U.S. corporations have "found ways" to absorb the impact of tariffs and predicted that consumer spending will remain resilient as long as employment stays strong.
Valuation Woes For Tech Sector
The rise in profits is particularly noteworthy in the tech sector, where companies are implementing AI and other technologies to drive efficiency. However, this shift has also led to job losses, as seen in the recent layoffs by Amazon (NASDAQ:AMZN), Meta (NASDAQ:META), and Salesforce (NYSE:CRM).
Additionally, the surge in earnings has led to concerns about a potential AI stock bubble, with investors questioning the sustainability of the current valuations. This has been reflected in recent market movements, including a selloff in tech and AI-linked stocks despite strong earnings reports.
Despite the current surge, there are also warnings of a potential market correction in the next two years, with Goldman Sachs and Morgan Stanley CEOs advising investors to prepare for a possible 10-20% drawdown in equity markets.
Price Action
Over the past six months, the SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 index and Nasdaq 100 index, respectively, climbed 15.09% and 20.06%, respectively, according to Benzinga Pro data.
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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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