US stocks rare differentiation! CEO raises profit expectations, analysts start to worry

This year, there is a rare differentiation in the profit outlook of American companies: analysts have lowered their expectations, but corporate guidance points to another strong earnings season.

Foreign media data shows that analysts expect S&P 500 index component companies to grow earnings by 4.2% year-on-year in the third quarter, lower than the 7% forecast in mid-July. On the other hand, corporate guidance suggests earnings will increase by about 16%.

Gina Martin Adams, Chief Equity Strategist at BI, said that this difference is "abnormally large," and the significantly strong outlook indicates that "companies should easily exceed expectations."

In a report, she wrote, "Amid economic uncertainty, companies emphasize efficiency, and profit margins are expected to continue to rise."

Meanwhile, Citigroup's Earnings Revision Index shows strong momentum in earnings revisions in September, falling to the lowest level since December 2022. Despite analyst concerns, the S&P 500 index hit a new all-time high last Friday, rising 22% year-to-date in 2024, marking the best start since 1997.

This suggests that investors are not deterred by the lowered expectations, but are betting that this earnings season will once again bring positive surprises, just like in the first quarter of this year when the expected growth was 3.8%, but the actual growth was 7.9%.

The U.S. stock market started the third quarter earnings season on a positive note. JPMorgan Chase unexpectedly saw growth in net interest income in the third quarter and raised this key revenue expectation, with the stock closing up about 4.5% last Friday, while Wells Fargo rose by 5.6%, indicating that the impact of interest rate cuts was not as bad as expected.

Morgan Stanley's Chief Strategist Michael Wilson wrote in a report on Monday, "Some large bank stocks had already derisked ahead of the mid-September earnings season, lowering the expectations threshold for this quarter. The preliminary results of the earnings season indicate that banks are surpassing this threshold."

Of course, there are also some warning signals. Earlier this month, Nike withdrew its full-year sales guidance ahead of the arrival of new CEO Elliott Hill to reset Wall Street's expectations. In late September, FedEx plummeted after warning that its business would slow down in the coming year.

Bank of America strategists Ohsung Kwon and Savita Subramanian wrote in a report last week, "Now that the rate-cut cycle has begun, the main focus is on companies' outlook for the future."

They lowered their S&P 500 index 2024 earnings per share forecast from $250 to $243 and added, "The bar is not high, as long as companies can address adverse macroeconomic factors and see early signs of improvement from falling interest rates, stocks should be rewarded."

Investors will ultimately focus on the "Big Seven" stocks that have been driving this year's market rebound, including Apple and NVIDIA. The market consensus expects their profits to grow by about 18% compared to last year, lower than the 36% growth in the second quarter. These seven stocks have lagged behind since the second quarter earnings season and have recently been consolidating, while the S&P 500 index's upward trend has widened Wilson from Morgan Stanley stated:

"The fundamental reason for the poor performance of the 'Seven Giants' may be that the growth rate of earnings per share is slowing compared to the strong growth rate last year. If earnings revisions indicate the relative advantage of the 'Seven Giants', these stocks may outperform the market again, as we did in the second quarter of this year and throughout 2023."