The S&P 500 Rally: Are We on the Brink of a Market Correction?

        

The Stock Market’s Rally: Is It About to Hit a Wall?

If you’ve been following the stock market recently, you’ve probably noticed that things have been looking pretty strong especially with the S&P 500 up more than 20% this year. But there’s a catch: Wall Street analysts are starting to scale back their earnings growth forecasts for Corporate America, and that could be a red flag for the market in the months ahead.

One of the key indicators analysts look at is something called "earnings revision momentum." Basically, it tracks how expectations for company profits are shifting whether analysts are raising or lowering their earnings per share (EPS) predictions for the S&P 500 over the next 12 months. Right now, that indicator is heading into negative territory, which isn’t a good sign. In fact, it's currently at one of its lowest points in the past year.

So, what does this all mean? Well, corporate earnings have been a huge driver of the stock market’s impressive gains over the past decade. But if earnings growth starts to slow down, it could take some of the wind out of the stock market’s sails.

Corporate Earnings: The Engine of the Rally

The market’s been on fire in 2024, with the S&P 500 heading for its second straight year of solid gains. But a lot of that rally has been fueled by strong corporate earnings, particularly from Big Tech companies like Apple, Microsoft, and Nvidia. These companies have been posting massive profits, which has helped push stock prices higher.

However, as analysts are starting to dial back their earnings forecasts, some are wondering if the rally might lose steam. According to Gina Martin Adams, Chief Equity Strategist at Bloomberg Intelligence, stocks could be "set up for a reversal." She points out that the big question heading into 2025 is whether the Federal Reserve will keep easing interest rates and whether earnings growth will extend beyond Big Tech to other sectors of the economy.

Looking Ahead to 2025: Is the Good News Over?

Despite the slowdown in earnings growth expectations, analysts are still somewhat optimistic about the third quarter of 2024. With about 90% of companies having already reported, earnings are expected to grow by about 8.5% compared to last year. That’s great news—especially considering how much of the growth has been driven by sectors outside of Big Tech.

But here’s the kicker: Even though the third-quarter numbers are looking solid, analysts have lowered their projections for the next 12 months. Why? There’s a lot of uncertainty around interest rates, the global economy (especially China), and political concerns in Washington. That’s making it harder for companies to offer clear guidance for 2025.

Looking further into next year, Wall Street is expecting S&P 500 companies to earn about $274 per share in 2025. While that’s not a huge drop from last year’s forecast of $277, it's a sign that analysts are becoming more cautious. Some sectors, like energy and materials, have been hit harder, especially with falling crude prices. But if you exclude those, earnings are still expected to grow by around 11% in Q3 2024, which is a solid number.

The Valuation Dilemma: Are Stocks Overpriced?

Now, here’s where things get tricky. The market’s been rallying, but valuations are looking pretty stretched. The S&P 500 is currently trading at around 22 times its expected earnings over the next 12 months, which is well above its average of 18.4 times over the past decade. In other words, stocks are getting pricey, and that means the market will need to see some strong earnings growth to justify those high valuations.

If corporate profits don’t deliver as expected in 2025, those lofty stock prices could be hard to maintain. Investors are going to need to see solid profit growth to keep feeling confident in the market’s long-term prospects.

Wrapping It Up: What Does This Mean for Investors?

So, what’s the takeaway here? The stock market has had a strong run in 2024, but the outlook for 2025 is a little more uncertain. Earnings growth is slowing down, and valuations are stretched, which could set the stage for a more challenging market environment in the near future.

For investors, this means we might be approaching a critical point. While optimism is still high, the combination of slowing earnings growth and expensive stock prices suggests that the rally we’ve enjoyed so far might not last much longer. Keep an eye on corporate earnings in the coming months because they’ll likely determine whether the stock market can keep climbing, or if it’s headed for a correction.