A rare divergence in US stocks! CEO raised profit expectations, but analysts began to worry

There was a rare split in the profit prospects of US companies this year: analysts lowered their expectations, but corporate guidance points to another strong earnings season.

According to foreign media data, analysts expect the third-quarter profit of S&P 500 companies to increase 4.2% year-on-year, lower than the 7% forecast in mid-July. On the other hand, the corporate guidelines suggest that profits will increase by around 16%.

Gina Martin Adams, chief stock strategist at BI, said that this difference is “unusually large” and that the clearly strong outlook indicates “companies should easily exceed expectations.”

She wrote in a report, “Amidst economic uncertainty, companies emphasize efficiency, and profit margins should continue to rise.”

Meanwhile, Citigroup's profit correction index showed strong momentum in September earnings correction, falling to its lowest level since December 2022. Despite analysts' concerns, the S&P 500 reached another record high last Friday, rising 22% so far in 2024, making it the best start since 1997.

This suggests that investors are not deterred by lowered expectations, but are betting that this profit season will once again have a positive surprise, just like the first quarter of this year. At that time, it was expected to grow by 3.8%, and as a result, it actually grew by 7.9%.

The third-quarter earnings season for US stocks began on a positive note. J.P. Morgan achieved an unexpected increase in net interest income in the third quarter and raised this key revenue forecast. The stock closed up about 4.5% last Friday, while Wells Fargo rose 5.6%, indicating that the impact of interest rate cuts was not as bad as expected.

Michael Wilson, chief strategist at Morgan Stanley, wrote in a report on Monday, “Some large bank stocks were already at risk before the mid-September earnings season, which lowered the expected threshold for this quarter. Preliminary results for the earnings season suggest that banks are breaking through this threshold.”

Of course, there are some warning signs. Earlier this month, Nike withdrew its full-year sales guidance to reset Wall Street expectations ahead of the arrival of its new CEO, Elliott Hill. In late September, FedEx crashed after warning that its business would slow down over the next year.

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

They lowered their 2024 earnings forecast for the S&P 500 index from $250 to $243, adding, “The threshold is not high. As long as companies can cope with adverse macroeconomic factors and see early signs of improvement brought about by falling interest rates, stocks should be rewarded.”

Investors will ultimately focus on the “Big Seven” stocks that are driving this year's stock market rebound, including Apple and Nvidia. Market consensus predicts that their profits will increase by about 18% compared to last year, which is lower than the 36% growth rate in the second quarter. Since the second-quarter earnings season, these seven stocks have lagged behind and have been trading sideways recently, and the rise in the S&P 500 index has expanded. Morgan Stanley's Wilson said:

“The root cause of the poor performance of the 'Big Seven' may be that earnings per share growth is slowing compared to last year's strong growth rate. If the earnings correction shows the comparative advantage of the 'Big 7, 'these stocks may once again outperform the market, just as we did in the second quarter of this year and throughout 2023.”