The recent earnings season has revealed a notable divergence between Wall Street analysts and listed companies regarding future profitability. Analysts have revised their profit growth expectations for S&P 500 constituents down to 4.2% for the third quarter, as opposed to the 7% forecast in mid-July. However, the companies themselves predict a robust 16% earnings growth, four times the analysts' forecast.
Gina Martin Adams from Bloomberg Industry Research highlights the significant difference in expectations, suggesting that companies are likely to surpass Wall Street forecasts. American banks like JPMorgan Chase (JPM, Financial) have reported strong results, with JPMorgan exceeding expectations in net interest income (NII) despite recent rate cuts by the Federal Reserve. Conversely, Wells Fargo’s NII fell short, though overall revenue and profit surpassed expectations.
Morgan Stanley's chief U.S. equity strategist, Mike Wilson, notes that banks reduced risk exposure ahead of earnings season, lowering expectations. Initial results demonstrate banks surpassing these lowered benchmarks. Analysts suggest this strong performance indicates the U.S. might be achieving a "soft landing," vital for financial stocks to thrive during rate cuts.
Despite this optimism, some believe the banks' performance reflects a "no landing" scenario for the U.S. economy, where growth remains robust without the slowdown or recession expected after a surge, yet inflation control remains elusive. Such a scenario offers mixed outcomes for stocks, benefiting from economic strength but constrained by rising risk-free rates, leading to overall market volatility.
JPMorgan's outstanding third-quarter performance, marked by higher-than-expected revenue and profits, underscores robust consumer spending and eased credit conditions. Prospects of inflation easing and rate cuts further support the "no landing" narrative.
As earnings season continues, investor focus will inevitably shift to major tech giants, including Apple, Nvidia, Microsoft, Alphabet, Amazon, Meta, and Tesla, collectively dubbed the "Mag 7." These stocks have underperformed the S&P 500 since their second-quarter earnings, with market expectations now predicting an 18% year-over-year profit growth slowdown from the previous quarter's 36% increase.
Morgan Stanley’s Wilson attributes the tech giants' underperformance to moderated earnings per share (EPS) growth. Should earnings revisions reveal a relatively strong showing, these stocks might outperform once again, narrowing the gap with the broader index, akin to trends observed in the second quarter and throughout 2023.
