Handicapping the Q3 Earnings Season

S&P 500 Q3 earnings are projected to grow +5.1% year-over-year on +6% revenue, which would mark the lowest growth rate since Q3 2023, despite an overall positive estimate revisions trend since late April. This aggregate growth is heavily dependent on the Tech and Finance sectors, which account for over 50% of the index's total earnings and have seen positive estimate revisions, largely offsetting downward pressures in 11 other sectors including Medical and Consumer Staples. Key earnings reports this week include Accenture, facing challenges from AI-driven IT spending shifts, and Costco, which has underperformed peers amid competitive pressures.

Analysis

The S&P 500 is poised for a significant deceleration in earnings growth for Q3 2025, with projections at +5.1% year-over-year, the slowest pace since Q3 2023. This aggregate figure, however, conceals a stark market divergence. Growth is heavily concentrated in the Technology and Finance sectors, which together constitute over 50% of the index's earnings and have seen positive estimate revisions since July. The Tech sector is particularly crucial, with expected earnings growth of +11.8%; without its contribution, the S&P 500's earnings growth would shrink to just +2%. This highlights a narrow market rally, as 11 of the 16 Zacks sectors, including Medical, Transportation, and Consumer Staples, have experienced downward estimate revisions. Upcoming earnings reports from Accenture (ACN) and Costco (COST) exemplify these cross-currents. Accenture faces significant headwinds, with its stock down -32.2% year-to-date due to flat IT spending outside of AI and the threat of AI-driven business disintermediation. Conversely, Costco is expected to report robust earnings growth of +12.8%, yet its stock has underperformed peers like Walmart (+4.4% vs. +13.6% YTD) amid concerns over competitive threats from Amazon's grocery delivery services and a moderately negative revisions trend for its next fiscal year.

Key Decisions for Investors

• Investors should maintain a sector-selective strategy, focusing on the strong outlook for Technology and Finance while exercising caution in the 11 sectors with negative estimate revisions, such as Medical and Consumer Staples, as index-level growth is not broad-based.
• Given Accenture's (ACN) significant stock underperformance (-32.2% YTD) and negative sentiment tied to AI disruption, it is critical to scrutinize its upcoming earnings for management's strategy to counter these threats before considering a position.
• Monitor Costco's (COST) earnings release as a potential catalyst, focusing on management's commentary regarding competitive pressures from Amazon to assess if the stock's recent underperformance presents a valuation opportunity despite strong expected earnings growth.
• Given the projected slowdown in aggregate S&P 500 earnings growth, investors should be aware of the market's high dependency on the tech sector and prepare for potential volatility in companies or sectors that fail to meet heightened expectations.