Key indicators of corporate profitability have fallen into negative territory, raising concerns that the surge in U.S. stocks may face an "emergency brake"?

According to the Zhitong Finance APP, Wall Street analysts are quickly lowering their expectations for U.S. corporate profit growth next year, which may soon put the brakes on the strong rise in the stock market.

Compiled data shows that a key indicator known as "earnings revision momentum"—which measures the upward and downward changes in the S&P 500 index's expected earnings per share over the next 12 months—has fallen to negative values and is hovering near the second worst level in the past year.

For most of the past decade, corporate earnings have been the cornerstone of the stock market's rise. Against the backdrop of this year's surge leading to overvaluation and increased positions, the deteriorating profit growth outlook could weaken further gains in the S&P 500 index. The benchmark index has risen for the second consecutive year, with an increase of over 20%, reaching its highest level since April 2021.

Gina Martin Adams, Chief Equity Strategist at BI, stated that the stock market is "preparing for a reversal. A major question entering 2025 is whether the Federal Reserve can continue to ease policy and whether the earnings momentum will benefit lagging companies outside of the large tech firms."

Of course, BI's data shows that analysts still expect the S&P 500 index to achieve its second-best profit growth since early 2022 in the third quarter, as the overall earnings range will exceed that of large tech companies. With about 90% of the constituent companies in the index having reported their results, it is expected that by September, the profits of the S&P 500 index will grow by 8.5% compared to the same period last year, double the initial estimate of 4.2% at the start of the earnings season.

Although profits are expected to grow for the fifth consecutive quarter, analysts have lowered their earnings per share expectations for the next 12 months. Previously, due to uncertainties surrounding Federal Reserve interest rate cuts, weakness in major Asian economies, and issues with U.S. government fiscal policy, executives provided a mixed outlook or were reluctant to offer guidance.

Even before Trump won the presidential election, the earnings revision magnitude for the S&P 500 index had been hovering around neutral in recent months. Strategists at Morgan Stanley, led by Mike Wilson, wrote in a report to clients that companies are "uncertain about the outcomes for 2024 and are unwilling to provide further guidance for 2025."

Despite analysts raising their expectations for the third quarter, the profit outlook for the entire year of 2025 has changed little. According to data compiled by BI, Wall Street expects the earnings per share for S&P 500 constituent companies next year to be around $274, slightly lower than the previous year's estimate of about $277.

Matt Lloyd, Chief Investment Strategist at Advisors Asset Management, stated: "As the new year approaches, you often see a tendency towards more realistic expectations. Coupled with the Federal Reserve's comments about not seeing a clear path for interest rate cuts, the negative factors become more tangible."

According to BI data, since mid-October, analysts have downgraded their annual forecasts for energy and materials companies due to the sharp decline in oil prices. Excluding the energy sector, which has distorted expectations due to falling commodity prices and weakened inflation, the S&P 500 index constituent companies are expected to see third-quarter earnings grow by about 11% year-on-year.

Overall, by 2025, the annual profit growth rate for S&P 500 index constituent companies is expected to reach 15%, up from the 8% projected for this year. However, the issue is that the earnings recession the index ended last year, while prolonged, was relatively shallow, which may open a door for profit expansion in the coming years that is smaller than what the stock market bulls hope for.

Data compiled by BI shows that from peak to trough, the S&P 500 index's earnings per share contracted by 13% during the three quarters of earnings recession that ended last year, viewed over the past 12 months. This is far below the median peak-to-trough decline of 26% since the late 1960s.

Companies will need to report strong profit growth and robust outlooks for next year to maintain and justify high valuations. In recent months, high valuations have driven the S&P 500 index above the 6000-point mark. The index's valuation is 22 times expected earnings for the next 12 months, well above the long-term average of 18.4 times over the past decade.

Adam Phillips, Managing Director of Portfolio Strategy at EP Wealth Advisors, said: "The reduction in the magnitude of interest rate cuts over the next few quarters may put pressure on the already high profit expectations."