CEO optimistic but Wall Street bearish? Significant divergence in earnings expectations for this financial reporting season in the US stock market

The financial reporting season that officially kicked off last week has seen a divergence in profit outlook between Wall Street and corporate leadership, with analysts lowering expectations while company guidance indicates continued strong profitability.

Data compiled by Bloomberg Intelligence (BI) shows that analysts expect earnings of S&P 500 index component companies to grow by 4.2% in the third quarter of this year, lower than the 7% year-on-year growth forecasted in mid-July. However, the companies' own expectations imply a growth of around 16%, nearly four times the analysts' expectations.

Gina Martin Adams, Chief Equity Strategist at BI, stated that the significant disparity in expectations between public companies and Wall Street is "unusually large," with the strong outlook indicating that "companies should easily exceed (Wall Street's) expectations."

Last Friday, several major U.S. banks that led the way in the financial reporting season showed positive results. Despite the Federal Reserve's significant 50 basis point rate cut in September, JPMorgan Chase's net interest income (NII) for the third quarter continued to exceed expectations, and the bank also raised its full-year revenue forecast. Wells Fargo's NII declined by 11% year-on-year, lower than expected, but revenue and profits were higher than expected.

Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley, a well-known bear on Wall Street, wrote in a report released on Monday, "Before the earnings season, several large bank stocks had already reduced risks in mid-September. This led to a lowering of the expectations threshold for this quarter. The preliminary results of the earnings season indicate that banks are surpassing this (expectation) threshold."

After the release of financial reports by two major banks last week, some analysts mentioned by Wall Street News believe that the strong performance of large banks may indicate that the U.S. economy has achieved a so-called "soft landing." Some analysts stated that during a rate cut cycle and the achievement of a soft landing, financial stocks often perform well.

However, bank performance reports may imply that the U.S. economy is "not landing." The so-called not landing usually refers to the economy not experiencing the expected slowdown or recession after high growth, but instead maintaining strong growth momentum without effective control of inflation levels, leading to a situation where the Federal Reserve has almost no room to cut interest rates. Stocks benefit from strong economic performance on one hand, but are also suppressed by rising risk-free rates, resulting in overall volatile trends.

JPMorgan Chase performed excellently in the third quarter, with revenue and profits both exceeding expectations. Meanwhile, consumer spending remained robust, credit conditions moderately eased, and expected inflation relief and rate cuts all provided support for the scenario of the U.S. economy "not landing."

As the financial reporting season continues, investors' attention will eventually turn to the seven tech giants that have been the main drivers of the U.S. stock market's rise this year - the so-called "Mag 7" including Apple, NVIDIA, Microsoft, Google's parent company Alphabet, Amazon, Meta (Facebook's parent company), and TeslaSince the announcement of the second-quarter financial reports, the overall performance of the "Seven Giants" has been inferior to the broader market, with the S&P 500 expanding while they consolidate.

The current market consensus expects that the profits of the "Seven Giants" in the third quarter will increase by about 18% year-on-year, a slowdown from the 36% growth in the second quarter.

Morgan Stanley's Wilson believes: "The fundamental reason for the poor performance of the 'Seven Giants' may simply be the slowdown in earnings per share (EPS) growth compared to last year's very strong growth. If profit revisions show that the 'Seven Giants' are relatively strong, these stocks may perform well again, and the gap in leadership compared to the broader market may narrow - just like in the second quarter of this year and throughout 2023."