3Q Estimate Being Revised Higher Marginally
Up until this point, the earnings discussion has largely focused on technology and AI capex, but one thing we noticed this past earnings season is that a “beat and raise” is not always enough to push a stock higher. Expectations are already quite high, and the bar continues to rise. Looking ahead to the third quarter, we are seeing estimates continue to be revised upward. Since the beginning of the third quarter, the consensus estimate has increased by roughly 1.5% and now stands at $89.81.
Monitoring Cost Growth With Higher Fuel Prices
Diesel, in particular, is an area we continue to monitor closely, as prices are now higher than at any point since the COVID-19 pandemic. Given that diesel is the lifeblood of U.S. transportation, sustained higher prices could present a meaningful challenge to corporate margins. Companies will likely try to absorb some of these higher costs initially, but they’ve already been doing so.
Ultimately, we see two likely outcomes: higher prices, which would add to inflationary pressures, or lower margins. There also isn’t a quick fix for bringing diesel prices back down, as there is no meaningful stockpile to draw from. At the same time, the consumer cushion appears increasingly depleted, with tax refunds likely already spent and the savings rate sitting at just 3%. That leaves consumers with less capacity to absorb another round of higher prices. The good news for now is that sales growth still exceeds cost growth by more than 2%.
Earnings Growth vs. Multiple Expansion
2026 has been all about earnings growth, with virtually no multiple expansion at the index level. While that is neither inherently positive nor negative, it does narrow the path forward. Looking ahead to 2027, returns are likely to become more reliant on multiple expansion. Historically, it’s rare to have two consecutive years in which earnings growth alone has driven the entirety of market returns outside of a recession.
Furthermore, the picture looks very different at the industry and company levels. The outsized growth in technology earnings has helped mask some of the underlying multiple expansion that has already taken place across parts of the market. As a result, investors may need to look beyond the headline index-level numbers to understand where valuations have actually expanded and where earnings growth is still doing the heavy lifting.
Source: Strategas
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.
Sincerely,
Fortem Financial
(760) 206-8500
team@fortemfin.com
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