Investing.com -- According to BCA Research, earnings growth will play a crucial role in sustaining the current stock market rally.
With Q3 earnings season officially starting on October 11, BCA highlights that the recent gains in the market were largely due to multiple expansion.
For the rally to continue, companies need to deliver strong earnings growth. “Broader earnings growth will also make the market more resilient,” BCA wrote.
For Q3, BCA expects earnings growth to reach 4.9% year-over-year, though BCA suggests the actual number could hit 10.5%—just slightly behind the 13% achieved in Q2—if historical surprises hold.
Meanwhile, sales growth is forecasted at 4.5%, but this figure could surpass 6% with typical upside surprises.
However, BCA says earnings deceleration is visible, especially for Consumer Discretionary and Utilities, while Technology, Communications, and Healthcare are expected to maintain double-digit growth.
The firm emphasizes that all sectors, aside from Energy and Materials, should post positive earnings growth.
They state that operating margins are also set to recover, with Q3 margins expected to rise to 12.7%, up from 11.2% in the same quarter last year.
The margin expansion is driven by declining labor costs and increased corporate pricing power. BCA forecasts continued margin improvement into Q4, reinforcing a positive outlook for profitability.
However, the research firm warns that earnings revisions have been significant, with estimates cut by 3.9% for the quarter, especially in sectors like Energy, Materials, and Industrials.
BCA stresses the importance of company commentary in evaluating the economic outlook: “What do companies see on the ground, soft landing or a recession?”
Additionally, with Generative AI investments accelerating, BCA said it is keen to learn whether these expenditures are delivering meaningful returns.
Ultimately, BCA believes the extension of the market rally hinges on ordinary companies delivering growth and taking over from the AI-driven gains that have led the market so far.