Here's how to invest in the Q3 earnings season as profits re-accelerate despite misplaced recession myths

• Earnings likely grew for the fifth consecutive quarter in Q3.
• Top strategists are eyeing 2025 results ahead of what's likely a mid-single-digit advance.

Corporate earnings are on pace for their best non-pandemic year since 2018, and market strategists expect the party to continue in the upcoming earnings season and into 2025.

Interest rates and inflation have been investors' primary concerns this year, and worries about the labor market, growth, and rising geopolitical tensions have also sucked up plenty of oxygen — even though economists generally agree that a recession isn't imminent.

Through all that noise, S&P 500 profits have steadily risen and are set to end the year up 9.5%, according to Factset. That's the biggest jump for earnings in six years, other than 2021's robust recovery. Analysts believe 2025 will be even better, with growth of nearly 15% in the cards.

Business Insider spoke with six investment chiefs, strategists, and money managers about the earnings and economic trends to watch in the Q3 earnings season and 2025 — plus how investors can position their portfolios for success.

Q3 earnings will give clues about consumers

Barring a major surprise, investors will learn starting in mid-October that earnings rose for the fifth straight quarter. Profits grew 4.6% in Q3, according to Factset's latest projections, though that would be down substantially from the 7.8% mark that analysts called for at the end of June.

However, analysts have a habit of underselling earnings. Nearly 79% of S&P 500 firms beat Q2 estimates — partially due to a low bar, though results were quite strong at 11.2% growth.

"What we've seen over the past few quarters, I really wouldn't describe as 'blowout growth' that sets up for disappointment going forward," said Mike Reynolds, Glenmede's vice president of investment strategy. Mid-single-digit to low-double-digit growth is "pretty sustainable," he added.

Profit margins will be in the crosshairs since inflation is slowing, said Anthony Saglimbene, the chief market strategist at Ameriprise Financial. He's also keeping a close eye on signs about the strength of consumer spending, or lack thereof, as wage growth dissipates.

"There's been a lot of pricing power — not only in technology, but across a lot of the services and goods sides of the equation," Saglimbene said. "Can you hold profit margins in an environment where maybe your costs are becoming more stable, but demand is starting to slow?"

Demand is either softening or steadfast, depending on your perspective. Joe Quinlan — who's head of markets strategy at Merrill and Private Bank, Bank of America — recently remarked that there's a strikingly wide gap between high-income households and those who aren't well off.

The strategy chief recently wrote that a mere 4.4% of US households make up 15% of personal consumption, which is the backbone of GDP. The rich are disproportionately driving economic growth because of the wealth effect, which means they're confident since stocks are rising. Meanwhile, Quinlan noted that roughly 40% of US households don't own stocks.

"They're the ones — the lower-income households — definitely feeling the squeeze of higher prices. I know inflation has come down when we look at the metrics, but prices for food, rent, insurance — they're still elevated," Quinlan said, adding that this is limiting disposable income.

Although weakness among lower-income households is troubling, strategists don't think it will show up in corporate earnings since consumers broadly are holding up.

"The consumer is pretty healthy," Reynolds said. "There's maybe some warning signs on the margin on credit-card balances and delinquencies, but it's really not enough to break the camel's back on earnings."

Why earnings will thrive in 2025

Although investors have only seen about half of 2024 earnings, which are on track to rise 10%, it's already time to look to 2025.

"As the year continues, I do think it's not about earnings for this year — it's the trajectory of earnings for next year," said Andrew Slimmon, a lead portfolio manager at Morgan Stanley Investment Management.

Corporate profits should stay strong and can potentially improve, strategists say, provided that the US economy doesn't slow too much.

"If the macroeconomic picture holds together, there's an expectation that we should see a bit of a re-acceleration in earnings growth," said Jim Baird, chief investment officer at Plante Moran Financial Advisors.

Quinlan agrees and predicted that "earnings will reflect the dynamic and resiliency of the US economy that we just closed the quarter on."

Michael Smith, the head of the growth equity team at Allspring Global Investments, said his research also indicates that companies are healthy, at least compared to a few years ago.

"We talk to our companies quite frequently and do our own work talking to their customers and suppliers, and we really feel like there are still some pockets of strong demand through our economy," Smith said.

And even if economic growth comes in light, corporate earnings won't necessarily suffer.

"There's not always a one-for-one relationship between economic growth and earnings growth," Reynolds said. "You can still see earnings growth at a pretty robust level, even if economic growth moderates to some extent. So again, there's correlation there, but definitely not direct causation."

Bears have long warned that this market is overvalued, but unless earnings suddenly plummet, Slimmon suggested that those fears are overstated.

"As long as Q3 of this year is OK, I think that's where we're going to start next year with close to $280 earnings estimates for the S&P," Slimmon said. "And that is supportive of a stock market that trades kind of closer to 6,000."

Analysts' estimates may be ambitious, Saglimbene said. He suspects that Q4 expectations will recede alongside projections for Q1 and Q2 of 2025, though that often happens before quarters.

"That could be a little bit of a headwind for the market," Saglimbene said. "But again, if we're growing and profits are growing year-over-year, I think the market will look past some of that."

Saglimbene later added: "We might not grow by 15% next year in an environment where the economy's growing 2%, but we might grow 7% or 8%. That's a normal earnings growth kind of environment, and I think that's enough to continue to push the market higher."

3 top places to invest heading into Q3 earnings

When asked which parts of the market look most attractive, strategists consistently identified three sectors: communication services, healthcare, and technology.

Large-cap growth stocks have carried the market higher for years thanks to their supercharged earnings. But that has changed in recent months, Saglimbene noted.

The strategy chief expects to see broader profit growth, especially in economically sensitive sectors like consumer discretionary, financials, industrials, materials, and real estate. They may also have more upside since they're cheaper.

"The areas that have not seen the best profit growth, like cyclicals outside of technology, their profit growth trends could actually improve more than expected because the economy is not headed for recession, because growth is remaining positive, because consumers are still spending," Saglimbene said.

Smith agrees that industrials and consumer-focused sectors are worth a look, as are tech and healthcare companies. His investing strategy is centered around finding growth stocks on the so-called "right side of change" that also happen to be discounted. He said he's found more opportunities in small- and mid-sized stocks lately.

"Money has to find a home somewhere, and it tends to flow to where it gets treated the best," Smith said. "Right now, the relative opportunity is down-cap."