Strength in corporate earnings has been a key source of support for the stock market, helping offset to some extent other worries about issues like trade uncertainty and the Fed outlook. The market will be looking for reconfirmation of earnings strength in the Q3 earnings season, which has gotten underway already but will really get going following October 12 releases from the big banks.

Our reading of the evolving earnings picture shows that while corporate profitability still remains very strong, it is not as strong and pristine as it was in the last few quarters. Overall growth reached its highest level in almost eight years in each of the last two quarters, with the growth pace starting to decelerate in the second half of the year and into next year, as you can see in the year-over-year quarterly earnings growth chart for the S&P 500 index below.

If we look at earnings growth for the S&P 500 index on a trailing 4-quarter basis, to smooth out the quarter-to-quarter variation, then the growth acceleration trend remains in place through 2018 Q4 before starting to trend down next year, as the chart below shows.

The above two charts of earnings growth show that growth has either peaked already or is close to peaking next quarter. But even more significant than growth deceleration is the fact that analysts have been cutting their earnings estimates for Q3 since the quarter got underway, as the chart below shows.

Please note that the negative revisions trend for Q3 is in contrast to the three preceding quarters when the revisions trend was a lot more favorable. A big part of the positive revisions over the last two quarters was due to the direct impact of the tax cuts. With that issue now behind us, the revisions trend appears to be moving back to how it has behaved over the last few years. That said, the magnitude of negative revisions to Q3 estimates is lower than the historical norm of the last few years. With the outlook for the global economy starting to weaken and companies starting to feel the pinch of cyclical cost inflation, this negative revisions trend will likely only accelerate going forward.

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