Yields fall as job openings shrink before Friday’s jobs report

NEW YORK – Treasury yields fell on Wednesday, with interest rate sensitive two-year yields hitting a 15-month trough, after data showed US job openings dropped to a 3-1/2-year low in July.

The closely watched yield curve between two-year and 10-year notes also turned positive for the first time since Aug. 5.

The August jobs report, due out on Friday, may help the Federal Reserve decide at its Sept. 17-18 meeting whether to cut interest rates by 25 or 50 basis points.

“The big event of the week comes in the form of Friday’s payrolls print,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets in New York.

“That’s to a large extent going to give us the road map for what to expect from the Fed. The employment data is now overshadowing inflation as the biggest risk to near-term policy expectations.”

Traders increased bets on a larger 50 basis points cut after Wednesday’s jobs openings report. They are now pricing in a 43% chance of a 50 basis point rate reduction, up from 39% before the data, and a 57% chance of a 25 basis points cut, CME Group’s FedWatch Tool showed.

Atlanta Fed President Raphael Bostic said on Wednesday the US central bank must not keep interest rates too high much longer or it risks causing too much harm to employment.

The market may have overreacted to Wednesday’s data, given that the economy is still showing solid growth, said Subadra Rajappa, head of US rates strategy at Societe Generale in New York.

“We don’t really have a lot of information to suggest that a recession is imminent,” Rajappa said. There is “nothing that would warrant the market pricing in such an aggressive path of rate cuts for the next year and a half.”

Traders see 237 basis points of rate cuts likely by the end of 2025.

Two-year note yields were last down 10.5 basis points on the day at 3.783% after hitting 3.772%, the lowest since May 2023.

Benchmark 10-year note yields fell 6.6 basis points to 3.778% after reaching 3.767%, the lowest since Aug. 20.

The yield curve between two- and 10-year Treasuries was at minus 0.70 basis points after reaching positive 0.60 basis points. This shift is a possible warning sign that a recession is approaching.

The 2/10 part of the yield curve has been mostly inverted since July 2022. It briefly turned positive on Aug. 5 before turning negative again.

The inversion, in which longer-dated yields are lower than shorter-dated ones, is typically viewed as foreshadowing a recession within the next 18 months to two years, though the current inversion has lasted longer than in previous episodes.

The curve typically turns positive before an economic downturn as investors price in expected rate cuts by the Fed.

Many analysts and economists, however, see the US economy as likely to weaken but avoid a recession.

Friday’s employment report is expected to show 160,000 new jobs in August, according to the median estimate of economists polled by Reuters. The unemployment rate is anticipated to have eased to 4.2% from 4.3% in July.

US economic activity expanded more slowly from mid-July through late August and businesses reported less hiring, the Fed’s latest Beige Book showed.

(Reporting by Karen Brettell; Editing by Jonathan Oatis and Richard Chang)

Dollar eases as US job openings fall; safe-haven bid lifts yen

NEW YORK – The dollar slipped against most major currencies on Wednesday after July US job openings data signaled a softening labor market, tilting the odds further in favor of larger interest rate cuts by the Federal Reserve.

Traders boosted bets that the Fed will deliver a half-a-percentage-point reduction at its next meeting, following news that job openings in July fell to the lowest level in 3-1/2 years.

Friday’s US payrolls report could offer further clues on the timing and pace of Fed rate cuts.

“The US central bank must not keep interest rates too high much longer or it risks causing too much harm to employment, Atlanta Federal Reserve President Raphael Bostic said on Wednesday.

The dollar index, which measures the US currency’s strength against six major peers, was down 0.3% at 101.4. The dollar slipped 1% to 144.07 yen, a one-week low, as global financial markets generally avoided riskier assets.

US stocks remained weak after Tuesday’s sharp sell-off sparked by concerns about the US economy and tech sector valuations.

Soft US manufacturing data released on Tuesday helped fan worries about a hard landing for the world’s biggest economy.

The dollar, which tumbled more than 2% against a basket of currencies in August, has steadied as rising volatility in global financial markets lifted demand for safer currencies.

“Stock market instability and dropping US yields have made the yen a strong performer,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.

The dollar index was about 1% above its late August low of 100.51.

“The USD has rebounded but is afraid to rebound any further until it gets more information,” Brad Bechtel, global head of FX at Jefferies, said in a note. “After Friday’s print we’ll either be 100 or lower or 104 or higher in DXY by my reckoning.”

Economists surveyed by Reuters expect Friday’s report to show an increase of 165,000 US jobs in August, after a rise of 114,000 in July.

Investors will also keep a close eye on jobless claims on Thursday.

The euro was 0.2% higher at USD 1.107075, recovering from early marginal declines.

Eurozone business activity received a boost from France hosting the Olympic Games last month but the malaise in the bloc is likely to return once the Paralympics wraps up as demand remains weak, a survey showed.

The Canadian dollar rose 0.3% against its US counterpart after the Bank of Canada cut its key policy rate by 25 basis points to 4.25% as forecast but expressed concern that weaker-than-expected growth might mean inflation falls too quickly.

Sterling rose 0.2% to USD 1.3138 after weakening to a low of USD 1.3101 overnight.

With investors avoiding riskier assets, cryptocurrencies faltered on Tuesday. Bitcoin fell about 1% to USD 57,751 and ether slipped about 0.8% to USD 2,444.

(Reporting by Saqib Iqbal Ahmed; Additional reporting by Kevin Buckland and Sruthi Shankar; Editing by Christina Fincher, Alison Williams, Angus MacSwan, and Richard Chang)

Nvidia has nothing to fear but a lack of fear

NEW YORK – Almost USD 300 billion worth of Nvidia got vaporized on Tuesday. It was the third sell-off in the USD 2.6 trillion US chipmaker’s shares this year, and like the previous two, it has little basis in industrial reality. The chances are that market volatility and changeable economic data will continue to buffet Nvidia’s stock, but the biggest risk to its valuation could come later, and come from within.

Nvidia is one of the biggest beneficiaries of the race to develop artificial intelligence, as its semiconductors and networking equipment are deployed in data centers used to train and run AI systems. Revenue is expected to double this year to around USD 125 billion, according to analyst estimates gathered by LSEG. The outlook there hasn’t changed. Giant customers still plan to spend billions on its chips. Meta Platforms, for example, intends to roughly increase its overall capital expenditure this year by around 50%, to USD 40 billion.

There can still be room for disappointment. The large internet and software firms that form part of its customer base may fail to monetize their AI initiatives enough to justify their USD 300 billion investment. At Meta, Mark Zuckerberg’s plans for open AI may turn it into a commodity. But there too, nothing has changed.

There are newer threats: the US Department of Justice has accelerated a probe into whether the company unfairly gave preferential pricing and chips to companies that exclusively use Nvidia and shun its rivals, according to Bloomberg. Rival chipmaker Intel settled with US regulators over similar issues over a decade ago. But such levies are rarely very damaging. Europe slapped a fine on Intel 15 years ago, yet that case is still ongoing.

If there’s something that should worry investors, it lurks further out – and Intel offers some foreshadowing. That former giant was once the chipmaker to beat. Its peak market capitalization in 2000 of roughly USD 500 billion is equivalent to nearly USD 1 trillion in today’s money. But Intel lost its manufacturing edge to specialized manufacturer TSMC and missed out on the shift to chips that power cellphones. Its US settlement played a role, making it easier for upstarts like Nvidia. But that was at root a problem of complacency. Intel stuck to what it knew, longer than it should have.

That kind of risk is hard to price in to a company’s shares, which probably means most investors aren’t pricing it in at all. Andy Grove, Intel’s chief executive just prior to the company’s zenith, said that “only the paranoid survive”. Intel didn’t take him at his word, but Nvidia boss Jensen Huang still can.

CONTEXT NEWS

Nvida’s stock fell 9.5% on Sept. 3, wiping around USD 380 billion off the US chipmaker’s market capitalization.

The US Department of Justice sent subpoenas to Nvidia and other companies to investigate whether the chipmaker violated antitrust laws, according to a Bloomberg story on Sept. 3, released after the market closed.

The DOJ is investigating whether Nvidia’s purchase of Run: ai, a software maker, will make it more difficult for customers to use other firm’s chips, and whether Nvidia gives preferential pricing and supply of chips to customers that use Nvidia technology exclusively, according to Bloomberg.

(Editing by John Foley and Pranav Kiran)

Gold rebounds from lows after weak US jobs openings data

Gold prices reversed course to gain on Wednesday, helped by a softer dollar and lower yields after falling US job openings signaled a possibility of an over-sized rate cut from the US Federal Reserve at its policy meeting this month.

Spot gold gained 0.1% to USD 2,494.24 per ounce as of 1:41 p.m. ET (1741 GMT), bouncing back from a two-week low of USD 2,471.80 hit earlier in the session. US gold futures settled 0.1% higher to USD 2,526.00.

Data showed US job openings in July fell to the lowest level in three and a half years.

Traders added to bets that the Fed will deliver a 50-basis-point reduction at its Sept 17-18 meeting, raising them to about 49% from 41% immediately before the data, rate futures contracts show.

“The data has shifted expectations for a little bit of a higher percentage chance of more than a 25-basis-point cut at the Fed meeting,” said David Meger, director of metals trading at High Ridge Futures.

JOLTS data indicates that there is an expectation that we are beginning to see a bit of a slowdown in the economy, leading to a pullback in the dollar, and interest rates continuing to creep lower, which is supportive to the gold market, Meger added.

ADP employment and jobless claims reports on Thursday and the non-farm payrolls report on Friday will also be closely scanned for cues on the Fed’s rate-cut path.

Markets expect 100 basis points of cuts by year-end, implying a 50-basis-point cut in one of the next three FOMC meetings, although it’s unlikely to be the first one, said Peter A. Grant, vice president and senior metals strategist at Zaner Metals.

Bullion, which offers no interest of its own, tends to thrive in a low-interest-rate environment.

Elsewhere, spot silver rose 0.5% to USD 28.18 per ounce, platinum gained 0.5% to USD 907.68 and palladium dipped nearly 1% to USD 929.25.

(Reporting by Anushree Mukherjee in Bengaluru, additional reporting by Swati Verma; Editing by Shreya Biswas and Janane Venkatraman)

Crude futures settle down by more than $1/bbl on demand fears

HOUSTON – Crude futures fell by more than USD 1 a barrel on Wednesday in see-saw trading, with traders worried about demand in coming months as crude producers offered mixed signals about supply increases.

Brent crude futures settled down USD 1.05, or 1.42%, to USD 72.70 a barrel. US West Texas Intermediate crude futures settled down USD 1.14, or 1.62%, at USD 69.20.

During the session, both benchmarks swung from USD 1 down to USD 1 up following news OPEC+ was discussing delaying a possible output increase because Libyan production is expected to rise.

In a broader sell-off, Brent crude futures tumbled as much as 11%, or about USD 9, in a little over a week, hitting a low of USD 72.63 on Wednesday.

Lackluster data from the US and China reinforced expectations of a weaker global economy and oil demand, helping set off a broader decline in world markets.

“It’s definitely worries about a slowdown in manufacturing,” said Phil Flynn, senior analyst at Price Futures Group. “That’s the only negative we’re seeing.”

Meanwhile, traders believed there could be an end in sight to a dispute halting Libyan oil exports, which would bring more crude supply back online.

“This sell-off moved the attention to what OPEC+’s response would be, which last week looked set to start the planned output hikes in October,” wrote Alex Hodes, analyst at StoneX. “The group is now concerned about pricing and sources say that a delay to the hikes is now being discussed.”

Recent data releases fed concerns of weak demand from China, the world’s biggest crude importer, and US consumption taking a hit.

On Saturday, Chinese data showed manufacturing activity sank to a six-month low in August, when growth in new home prices slowed.

On Tuesday in the US, the Institute for Supply Management data showed manufacturing remained subdued.

Weekly US oil inventory data was delayed by Monday’s Labor Day holiday. The report from the American Petroleum Institute is due at 4:30 p.m. EDT (2030 GMT) on Wednesday and data from the US Energy Information Administration will be published at 11:00 a.m. EDT (1500 GMT) on Thursday.

US crude and gasoline stockpiles were expected to have fallen last week, a preliminary Reuters poll showed.

While traders were pessimistic about demand fears, changes in supply could easily change sentiments, Flynn said.

“We could flip on a dime,” he said. “It could very easily turn positive. We could see a pretty decent crude draw later today.”

(Reporting by Erwin Seba, Additional reporting by Paul Carsten, Ahmad Ghaddar in London, Yuka Obayashi in Tokyo, and Jeslyn Lerh in Singapore; Editing by Louise Heavens, Mark Potter, Emelia Sithole-Matarise, and David Gregorio)

Growth fears, tech slump bring on September blues

World markets will open on an extremely shaky footing on Wednesday after a gloomy snapshot of US factory activity on Tuesday reignited fears about the US economy’s “soft landing” and slammed stocks, oil prices and bond yields sharply lower.

It was the first trading day of September for US markets after the Labor Day holiday weekend, and for those who put greater store in “seasonal” factors, it is an ominous start to what is traditionally a weak month for stocks and risk appetite.

Many market moves on Tuesday were the largest since the historic volatility burst on Aug. 5 – Wall Street, world stocks and Treasury yields had their biggest declines and US equity volatility had its biggest rise since that day.

Others were even more eye-opening and ominous.

Oil slumped 5%, its biggest fall this year and a reflection of investors’ worries over US and Chinese growth. If demand and economic activity are wavering in the world’s top two economies, Houston, we have a problem.

On top of that, Nvidia shares tanked 10%, wiping around USD 265 billion off the company’s value in one of the biggest one-day market cap losses on record. If Nvidia has been responsible for much of the tech- and AI-fueled equity rally over the past 18 months, selloffs of this magnitude are a worry.

Weak purchasing managers index data from China and the United States are setting the negative tone, and there are more Asia and Pacific PMI reports scheduled for release on Wednesday, including China’s ‘unofficial’ Caixin service sector PMI.

China’s ‘official’ PMI figures from Beijing over the weekend showed that manufacturing activity sank to a six-month low in August as factory gate prices tumbled and owners struggled for orders. Shanghai stocks open on Wednesday at a seven-month low.

Australian GDP figures are also on tap on Wednesday. Economists polled by Reuters predict growth in the second quarter accelerated to 0.3% from 0.1% at a quarter-on-quarter pace, but year-on-year growth held broadly steady at 1.0%.

After the broad-based and aggressive selloff in US stocks on Tuesday, Asian markets will almost certainly open in the red on Wednesday – the old adage still stands: when the US catches a cold, the rest of the world sneezes.

Institute for Supply Management figures show that US manufacturing activity has contracted every single month since October 2022, with the exception of March this year. That’s nearly two years of uninterrupted manufacturing recession.

This has been offset by expansion in services activity, but rates traders are now attaching a near 40% chance of the Fed beginning its easing cycle later this month with a 50 basis point cut.

Here are key developments that could provide more direction to Asian markets on Wednesday:

– China ‘unofficial’ Caixin services PMI (August)

– Australia GDP (Q2)

– South African President Ramaphosa’s State Visit to China

(Reporting by Jamie McGeever)

Nvidia suffers record USD 279 billion loss in market value as Wall St drops

Shares of AI heavyweight Nvidia tumbled 9.5% on Tuesday in the deepest ever single-day decline in market value for a US company, as investors softened their optimism about artificial intelligence in a broad market selloff following tepid economic data.

Nvidia lost USD 279 billion in market capitalization, a major indication that investors are becoming more cautious about emerging AI technology that has fueled much of this year’s stock market gains.

The PHLX chip index plummeted 7.75%, its biggest one-day drop since 2020.

The latest jitters about AI come after Nvidia last Wednesday gave a quarterly forecast that failed to meet the lofty expectations of investors who have driven a dizzying rally in its stock.

“Such a massive amount of money has gone to tech and semiconductors in the last 12 months that the trade is completely skewed,” said Todd Sohn, an ETF strategist at Strategas Securities.

Intel dropped nearly 9% after Reuters reported CEO Pat Gelsinger and key executives are expected to present a plan to the company’s board of directors to slice off unnecessary businesses and revamp capital spending at the struggling chipmaker.

Worries about slow payoffs from hefty AI investments have dogged Wall Street’s most valuable companies in recent weeks, with shares of Microsoft and Alphabet trading lower following their quarterly reports in July.

“Some recent research has questioned if the revenues from AI alone will eventually justify this wave of capital spending on it. When assessing AI capex by individual companies, investors must consider if they are making the best use of their balance sheets and capital,” BlackRock strategists wrote in a client note on Tuesday.

At its July record high close, Nvidia had almost tripled in 2024. Its recent losses leave it up 118% year to date.

Tuesday’s weakness in chip stocks accompanied wide declines on Wall Street, with the Nasdaq dropping 3.3% and the S&P 500 down 2.1%.

Investors mostly expect the Federal Reserve to cut interest rates by 25 basis points in its Sept. 18 policy announcement, according to CME’s FedWatch Tool.

However, minority expectations of a 50 basis point cut rose to 37% from 30% after data on Tuesday signaled activity in the manufacturing sector remains soft.

Investors will get a host of data on the labor market this week, culminating in Friday’s key government payrolls report.

“There’s concern about what the job numbers are going to show, about seasonality,” warned Steve Sosnick, a market strategist at Interactive Brokers.

The chip index is now up 14% in 2024, just under the S&P 500’s 16% gain.

Nvidia’s record one-session loss in stock market value was greater than the USD 232 billion decline suffered by Facebook-owner Meta Platforms on Feb. 3, 2022, when the social media company issued a dismal forecast, according to LSEG data.

Following Nvidia’s quarterly report last week, the mean analyst estimate for annual net income through January 2025 has climbed to USD 70.35 billion from about USD 68 billion ahead of last week’s report.

Those increased earnings estimates, combined with Nvidia’s share losses, have the chipmaker now trading at 34 times expected earnings, down from over 40 in June and in line with its two-year average.

Broadcom, another chipmaker that has benefited from the boom in AI computing, fell 6.2% ahead of its quarterly report on Thursday.

(Reporting by Noel Randewich; Editing by Jonathan Oatis and Bill Berkrot)

Wall Street drops on September worries, upcoming data

NEW YORK – US stocks slumped on Tuesday, at the start of one of the market’s historically worst months, ahead of data likely to influence how much the Federal Reserve will lower interest rates.

The benchmark S&P 500 index, Nasdaq Composite Index, and the Dow Jones Industrial Average recorded their biggest daily percentage declines since early August. Nine out of 11 S&P 500 sectors fell, led by declines in technology, energy, communication services, and materials.

Market sentiment weakened as Institute for Supply Management data on Tuesday showed US manufacturing remained subdued despite a modest improvement in August from an eight-month low in July.

September is widely regarded as one of the worst months for stock market performance based on data stretching back to the 1950s, said Jason Browne, president at Alexis Investment Partners in Montgomery, Texas.

“We had a weak ISM report come out this morning, but we do believe seasonality is a big factor here especially when you’ve had such a solid performance for the year until the end of last month,” Browne said.

“Everybody is reporting about how September is such a horrible month and that tends to feed on itself.”

The so-called Magnificent Seven megacap technology stocks, which have led this year’s rally, slumped. Nvidia dropped nearly 10%, shedding USD 279 billion from its market capitalization, which finished at USD 2.65 trillion.

Alphabet fell 3.6%, Apple lost 2.7% and Microsoft shed 1.8%. The Philadelphia SE Semiconductor index fell 7.8%.

The Dow fell 626.15 points, or 1.51%, to 40,936.93, the S&P 500 dropped 119.47 points, or 2.12%, to 5,528.93 and the Nasdaq Composite slid 577.33 points, or 3.26%, to 17,136.30.

The CBOE Volatility Index, Wall Street’s fear gauge that measures market expectations of stock market swings, jumped 33.2% to 20.72, the biggest daily percentage gain and highest close since early August.

Traders are awaiting several labor market reports ahead of Friday’s non-farm payrolls data for August.

The Fed’s meeting on Sept. 17-18 will be closely observed following Chair Jerome Powell’s recent support for easing monetary policy.

The odds of a 25-basis point interest rate cut are at 63%, the CME Group’s FedWatch Tool showed, while those for a bigger 50 bps reduction are at 37%.

Tesla fell 1.6% after Reuters reported that the electric vehicle maker plans to produce a six-seat variant of its Model Y car in China from late 2025.

Boeing dropped 7.3% after Wells Fargo downgraded the aircraft manufacturer’s shares to “underweight” from “equal weight.”

Declining issues outnumbered advancers by a 2.52-to-1 ratio on the NYSE, which had 297 new highs and 83 new lows. On the Nasdaq, 946 stocks rose and 3,315 fell as declining issues outnumbered advancers by 3.5 to 1.

Volume across US exchanges totaled 12 billion shares, up from nearly 11 billion for the 20-day moving average.

(Reporting by Chibuike Oguh; Additional reporting by Johann M Cherian and Purvi Agarwal in Bengaluru; Editing by Richard Chang)

US Treasury yields drop as weak manufacturing data persists

NEW YORK – US Treasury yields were mostly lower on Tuesday, with the benchmark 10-year note on track to snap a five-session streak of gains, after data signaled activity in the manufacturing sector remains soft.

The Institute for Supply Management (ISM) said its manufacturing PMI rose to 47.2 in August from an eight-month low of 46.8 in July, and remained below the 50 reading to indicate contraction for the fifth straight month.

“The bounce in manufacturing from July’s abysmal reading wasn’t all that great. New orders dropped, which doesn’t augur well for a future rebound in activity,” said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

“The Fed cares about the labor market, not the manufacturing sector. It will take service sector weakness to scare the Fed into doing more than a 25 basis point cut and that just doesn’t seem to be in the cards for now.”

Investors will get a host of data on the labor market this week, culminating in Friday’s key government payrolls report.

The yield on the benchmark US 10-year Treasury note fell 7 basis points (bps) to 3.841%. The yield snapped a two-week streak of declines last week as economic data boosted expectations the Fed was more likely to opt for a smaller cut of 25 basis points at its Sept. 18 policy announcement.

Markets have fully priced in a rate cut of at least 25 bps at the upcoming meeting, with expectations for a cut of 50 bps climbing to 37% after the data, up from 30% in the prior session, according to CME’s FedWatch Tool.

The yield on the 30-year bond fell 6.2 basis points to 4.134%.

Recent comments from Fed policymakers signal the majority are ready to support a rate cut by the central bank at its September meeting.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 2.5 basis points.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, fell 6.2 basis points to 3.865%, on track for its biggest daily drop since Aug. 23.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.001% after closing at 2.034% on Aug. 30.

The 10-year TIPS breakeven rate was last at 2.123%, indicating the market sees inflation averaging about 2.1% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Alexander Smith)

Corporate America has a revenue problem

ORLANDO, Florida – Nvidia’s share price slump after its strong, but not exceptionally strong, second-quarter results raises a broader question for US stocks: Are 2025 earnings growth forecasts too optimistic?

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

Still, these lofty predictions could be realized assuming the Federal Reserve steers the economy toward a soft landing and lops off at least 200 basis points from the fed funds rate by the end of next year, as markets currently expect.

Two major economic data points last week indicated that the “Goldilocks” conditions needed to back up these rosy forecasts are in place: Second quarter GDP growth was revised up to 3.0% and annual core PCE inflation in July was a lower-than-forecast 2.5%.

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

That’s obviously very good news for corporate America. If steady disinflation continues to sustain real wage growth, company executives can expect demand for their goods and services to hold up.

Indeed, CEOs and CFOs of S&P 500 firms mostly offered upbeat guidance in the season that just closed, especially around “key financial terms” such as earnings, revenue, and margins, according to an HSBC analysis of company earnings calls.

But there’s a problem. Revenue.

MIND THE GAP

While nearly 80% of large US firms registered beats on earnings in the second quarter, only 60% outperformed sales expectations. That’s one of the lowest levels of sales beats in the last 17 quarters, according to HSBC, and below the average of 62% over the last two decades, according to LSEG/Refinitiv.

Aggregate revenue for S&P 500 companies is currently expected to grow by 6% next year, according to LSEG/Refinitiv. That would mark a rise from this year’s estimated 4.7%, but would still be almost 10 percentage points short of projected earnings growth for 2025.

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

In other words, profits will have to be juiced by exceptionally high margins to support the expectations baked into today’s S&P 500 index level. Is this feasible?

Average profit margins for large US companies, excluding financials and resources, are currently running above 9%. That’s one of the highest rates in recent decades apart from the distorted 2021 post-pandemic period.

But analysts at JP Morgan warn that top line growth is about to weaken and net interest expenses are poised to pick up again. Margins will be squeezed.

Today’s earnings outlook seems especially optimistic considering where we are in the economic cycle. While growth was solid in the second quarter, the trends are clear: Activity is cooling, and the labor market is weakening – especially for those seeking to enter the labor force.

As is increasingly the case, the aggregate picture might depend mostly on how Nvidia and the other megacap Big Tech firms perform. Earnings growth estimates for tech next year are running north of 20%. In fact, if you remove Nasdaq 100 companies from the equation, overall earnings growth expectations for large US firms drops to a more reasonable 10%.

While it’s unlikely that the “magnificent seven” will truly stumble in the coming year or that the economy will tank, the response to Nvidia’s Q2 results highlights the danger of pricing in perfection. One doesn’t need to be an equity bear to recognize that a lot of things need to go right for 2025 earnings expectations to materialize and just a few things need to go wrong.

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

(Reporting by Jamie McGeever; Editing by Jonathan Oatis)

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