Column-Corporate America has a revenue problem: McGeever By Reuters

By Jamie McGeever

ORLANDO, Fla. (Reuters) – Nvidia’s (NASDAQ: ) share price slump after its strong but not exceptionally strong second-quarter results raises a broader question for U.S. stocks: Are 2025 earnings growth forecasts too optimistic?

The total earnings growth forecast for 2025 for S&P 500 companies rose steadily from 13.7% in April to 15.3% today, according to LSEG/Refinitiv. That’s well above the 10.2 percent growth projected for this year and among the strongest rates on record this century.

However, these lofty forecasts could be achieved assuming the Federal Reserve steers the economy toward a soft landing and cuts at least 200 basis points from the federal funds rate by the end of next year, as markets currently expect.

Two major economic data last week indicated that the “Block of Gold” conditions needed to support these rosy forecasts are in place: second-quarter GDP growth was revised up to 3.0%, and annual core PCE inflation in July it was lower than the estimated one, 2.5. %.

On a three-month annualized basis, core PCE inflation is tracking at 1.72%, below the Fed’s 2% target.

This is obviously very good news for corporate America. If steady disinflation continues to support real wage growth, company executives can expect demand for their goods and services to remain strong.

Indeed, CEOs and CFOs of S&P 500 firms mostly provided upbeat guidance in the season just ended, particularly in “key financial terms” such as earnings, revenue and margins, according to a HSBC analysis of company earnings calls.

But there is a problem. Income.

BEWARE OF THE SCHEDULE

While nearly 80 percent of large U.S. firms reported an increase in earnings in the second quarter, only 60 percent beat sales expectations. This is one of the lowest levels of sales in 17 quarters, according to HSBC, and below the 62% average over the past two decades, according to LSEG/Refinitiv.

Aggregate revenue for S&P 500 companies is currently expected to grow 6% next year, according to LSEG/Refinitiv. That would mark an increase from the 4.7 percent expected this year, but would still be nearly 10 percentage points short of projected earnings growth for 2025.

That would be one of the biggest gaps in at least 13 years, according to LSEG/Refinitiv figures.

In other words, profits will need to be raked in by exceptionally high margins to support expectations contained at current levels. Is this feasible?

Average profit margins for large US companies, excluding finance and resources, are currently over 9%. This is one of the highest rates in decades, except for the skewed post-pandemic 2021 period.

But analysts at JP Morgan warn that top-line growth is about to weaken, and net interest expenses are about to rise again. Margins will be tight.

Today’s earnings outlook looks particularly bullish given where we are in the economic cycle. Although growth was solid in the second quarter, the trends are clear: activity is cooling and the labor market is weakening — especially for those looking to enter the workforce.

As is increasingly the case, the aggregate picture could depend largely on how Nvidia and other Big Tech megacaps fare. Estimates for tech earnings growth next year are up to 20%. In fact, if you remove companies from the equation, the overall earnings growth expectations for large US firms fall to a more reasonable 10%.

While it’s unlikely that the “magnificent seven” will really stumble in the coming year or the economy will show, the response to Nvidia’s second-quarter results highlights the danger of pricing perfection. You don’t have to be an equity bear to recognize that a lot has to go right for 2025 earnings expectations to materialize, and only a few things have to go wrong.

(The opinions expressed here are those of the author, columnist at Reuters)