The new round of US stock earnings season kicks off, these five major themes are worth paying attention to

According to the latest information from Zhitong Finance and Economics APP, as the new round of earnings season has kicked off, the strong rally in the US stock market this year may face its biggest test. Data from Bloomberg Intelligence shows that strategists predict S&P 500 index component companies will report their weakest earnings in the past four quarters, with third-quarter profits expected to increase by only 4.3% year-on-year.

Despite the decline in earnings expectations, the S&P 500 index hit a new high last Friday, up 22% year-to-date in 2024. Investors bullish on the US stock market may have a point, as there seems to be room for earnings surprises if these downward revised expectations are proven to be overly pessimistic. This scenario occurred in the first quarter when earnings expectations were expected to grow by 3.8% year-on-year, but the actual result was a 7.9% increase.

Baird investment strategist Ross Mayfield stated, "Analysts' downward revisions to earnings per share estimates are larger than usual, which may increase the probability of exceeding expectations and lead to better stock market performance."

Here are five key themes for investors to watch during the third-quarter earnings season:

1. Slowdown in Profit Growth for Tech Giants

Most of the profit growth of S&P 500 index component companies still comes from large tech companies, which are seen as the primary beneficiaries of artificial intelligence development. The so-called "Big Seven" in the US stock market - Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla - are expected to see a profit growth of 18% in the third quarter. However, data from Bloomberg Intelligence shows that the issue lies in the fact that the profit growth of these tech giants is slowing down, falling below 30% from 2023.

Furthermore, data shows that profits of S&P 500 index component companies other than the "Big Seven" are expected to grow by 1.8% in the third quarter, marking the second consecutive quarter of growth, albeit small. Bloomberg Intelligence data indicates that profit growth for the remaining 493 component companies in the S&P 500 index is expected to accelerate significantly from now on, with double-digit growth projected by the first quarter of 2025.

2. Paradise for Stock Pickers

Investors may anticipate significant volatility in certain individual stocks that will not be reflected in the broader market indices. The options market is pricing in the largest average performance implied volatility at the single-stock level since data collection began in 2021 when Bank of America started collecting data However, Ohsung Kwon, the stock strategist at Bank of America, stated that the implied volatility at the index level is relatively low, indicating that this earnings season may be a "stock picker's paradise."

Among the 11 sectors of the S&P 500 index, three sectors - technology, communication services, and healthcare - are expected to see profit growth of over 10%. On the other hand, the energy sector is expected to report a decline of over 20%. Gina Martin Adams, Chief Stock Strategist at BI, mentioned that due to the sharp drop in crude oil prices last quarter, the energy sector has the largest decline in profit expectations among the 11 sectors.

3. Profit Margins

Wall Street professionals will closely monitor profit margins, a key indicator of measuring the effectiveness of a company's profitability. Data shows that profit margins for the third quarter are expected to decline to around 12.9%, lower than the 13.1% in the second quarter, but slightly higher than the 12.8% in the third quarter of 2023. This slight decrease reflects the challenges some companies face in passing on input costs to consumers, as wage pressures still exist in low-productivity industries that are difficult to automate.

According to Bloomberg Intelligence data, the energy and real estate sectors are expected to have the lowest profit margins, but from a broader perspective, a rebound is expected in the coming quarters.

4. Turbulent European Markets

In Europe, the new earnings season may mark a turning point for the pan-European Stoxx 600 index, which is currently hovering near historic highs. Analysts have lowered profit expectations for the index's component companies due to weak economic growth in the Eurozone.

While the lowered profit expectations have reduced the threshold for beating expectations, the expectations for 2025 remain high, and any indications of weakening consumer demand will force these forecasts to be revised down, further impacting stock prices of companies. Many well-known companies, including Swedish clothing retailer Hennes & Mauritz AB and Volkswagen, have issued profit warnings in recent weeks 5. Election Focus

With only a few weeks left until the US presidential election, investors will be listening to corporate executives' views on economic and trade policy risks, as well as other political issues. Data from Bank of America shows that about 110 companies mentioned the word "election" in their second-quarter earnings conference calls, a 62% increase from four years ago.

Ohsung Kwon, a stock strategist at Bank of America, said that history indicates that corporate investment activity tends to accelerate after the US election, which could be a catalyst for companies to release capital in the coming quarters, especially in a scenario of declining interest rates.

However, companies may also postpone some expansion plans and other expenditures. Jeff Buchbinder, Chief Equity Strategist at LPL Financial, stated, "Today, so much capital investment is related to artificial intelligence that the election is unlikely to suppress this. However, given how close we are to the election now, due to political uncertainty, some more traditional capital commitments may be delayed."