Q3 earnings season gets underway next week, and expectations are high. Economists are expecting 8% earnings growth among S&P 500 companies, according to data compiled by FactSet. It would be the eighth consecutive quarter of at least 8% profit growth among U.S. companies – perhaps the biggest reason stocks have been on a tear the last two years.
In recent quarters, earnings have come in well ahead of their “preseason” expectations, delivering double-digit growth in each of the last two quarters (13% in Q1, 12% in Q2).
Given how far stocks have climbed since the April Liberation Day-fueled bottom, it’s quite possible they’ll require a third straight quarter of double-digit earnings growth to keep advancing to new heights.
Eight percent growth would certainly be nothing to sneeze at, but Wall Street – especially in this age of jaw-dropping earnings beats among artificial intelligence leaders like Oracle (ORCL) and Broadcom (AVGO) – wants to be wowed. So earnings will likely have to not only cross a high earnings bar this season, but do so with room to spare.
Of course, nothing has slowed this market for months. Not tariffs, not a decelerating jobs market, not AI bubble fears, not a government shutdown. To doubt that this market can continue on its merry way through the end of the year would be to underestimate the power of stock market trends – which, as Tim Lutts, my former Cabot boss, used to say, always last longer than anyone expects.
[text_ad]
So you need to ride the trend. And while buying AI stocks willy-nilly at these elevated levels seems unwise, you should at least have some AI exposure. And exposure to gold, with gold prices surpassing the $4,000 mark this week and with seemingly no end to its furious rally in sight. But, to truly fortify your portfolio against a potential pullback or mini-correction if earnings fail to excite people in the coming month or so, you’ll need some undervalued plays in your portfolio as well.
Add Value Stocks to Weather Q3 Earnings Season Bumpiness
Value stocks are having a good year too, even if not as impressive as growth stocks, particularly big-tech AI names. The Vanguard Value Index Fund (VTV) is up more than 10% year to date, on track for its best year since 2021.
Meanwhile, undervalued stocks are less likely to get knocked back on earnings, as expectations are lower and modest beats aren’t punished the way some hyper-growth companies have been in recent quarters.
Take the stocks in my Cabot Value Investor newsletter portfolio, for instance. They are up an average of 15% year to date, narrowly outpacing the S&P 500 and outperforming the VTV by a fairly significant margin.
A big reason is earnings: for the majority of value stocks I’ve recommended this year, earnings beats have helped propel the stock price higher – instantly, in many cases, and in the aggregate for the year. With big tech and AI plays stretched to almost unprecedented valuations, their earnings results are more likely to disappoint than delight the investing masses.
Sort of how the greatest NBA, NFL or MLB players are more likely to get criticized for their few flaws (“Yeah, but Aaron Judge still isn’t hitting homers in the playoffs;” “Yeah, but Josh Allen still throws too many interceptions;” “Yeah, but LeBron James doesn’t play defense like he used to”), the bigger the stock name, the sharper the fall if they fail to meet or even soundly beat earnings estimates.
I don’t ever recommend buying stocks based on or in anticipation of one earnings cycle. But in the bigger picture, it pays to have a well-rounded portfolio, not just AI stocks. And that could be especially true this earnings season, if companies fail to top – or even comfortably exceed – their collective 8% growth threshold.
It pays to have value stock exposure in your portfolio. And if you need help finding the right ones, I have a portfolio full of them in my Cabot Value Investor advisory.
[author_ad]
