The reporting season in the USA has begun. Rarely have quarterly figures been awaited with such excitement as this time - and rarely have investors on Wall Street trembled so much before the results.
On Tuesday, four of the 30 companies in the leading Dow Jones index presented their quarterly figures. The banks JP Morgan and Goldman Sachs as well as the pharmaceutical company Johnson & Johnson and the insurer United Health promptly confirmed the fears of many investors.
Although the overall results were better than expected, no company was rewarded with a significant increase in share prices. “This shows how high the bar has now been set,” says analyst Andreas Lipkow from online broker CMC Markets.
In the second quarter, net profit per share in the market-wide US S&P 500 index rose by 32 percent compared to the previous year, analysts at Bank of America (BofA) calculated. The consensus estimate for the third quarter is an increase of 27 percent.
Analysts expect all eleven S&P 500 sectors to post positive year-over-year growth in both sales and profits. This is extraordinary, says independent analyst Ed Yardeni: “Only once before, in the second quarter of 2021, has such a perfect result occurred in the 25 years we have been collecting this data.”
Yardeni cites the rapid rise in corporate profits as the reason why the S&P 500 reached a record high just last week - although the rise in energy prices caused by the Iran war is putting pressure on companies as well as the rise in interest rates. He invented the term “Fabulous Earnings Momentum” for this.
There is correspondingly great optimism among industry analysts. In recent months, they have further increased their consensus earnings growth forecast, reports Yardeni: "Instead of declining over the quarter as usual, it increased by 3.0 percentage points."
However, this also makes the situation for the stock market more complicated, explains analyst Sören Hettler from DZ Bank: “In recent quarters, the US indices in particular have repeatedly managed to clearly exceed already ambitious consensus estimates.” This was also necessary in order to keep hopes of further significant increases in profits alive.
“Simply achieving market expectations can result in an abrupt price correction,” warns Hettler. Such a correction did not occur at JP Morgan, Goldman Sachs, Johnson & Johnson and United Health, but the quarterly figures did not provide any positive impulses either.
That's why analyst Lipkow states: "Good numbers alone are no longer enough to spark new price fantasy. Companies now have to significantly exceed expectations in order to attract more buyers."
BofA experts Savita Subramanian and Victoria Roloff also warn: “After the big positive surprises in the last two quarters, solid earnings beats are now the norm and may no longer be enough to drive share prices further up.”
They expect investors will look for signals that growth is sustainable despite pressure from rising interest rates and higher commodity prices - and this is where investors could potentially be disappointed. Analysts' consensus estimate expects the S&P 500's net earnings to rise 16 percent in 2027. However, BofA only expects an increase of twelve percent.
“The interplay between geopolitics, interest rates and technology may be underestimated,” explain Subramanian and Roloff. “Higher capital costs and geopolitical bottlenecks could bring what has been a largely smooth development to a standstill.”
However, not only profit growth itself could prove to be a burden, but also its unequal distribution. For the chip and energy sectors, analysts expect an increase of more than 120 percent in the third quarter compared to the previous year.
The energy sector is benefiting from increased raw material prices. A barrel of US WTI oil is currently almost 60 percent more expensive than a year ago. The chip sector is benefiting from continued strong investment activity in the area of artificial intelligence (AI). The five largest data center operators (hyperscalers) are likely to have increased their capital expenditure in the third quarter by more than 110 percent compared to the previous year, explain Subramanian and Roloff.
However, if you exclude the energy, technology and the “Magnificent Seven” sectors of the stock market – meaning Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – the median growth in net earnings per share is likely to slow: from twelve percent in the second quarter to seven percent in the third quarter. With the exception of the healthcare sector, all sectors are likely to increase their profits more slowly than in the previous quarter.
Hettler therefore states: “The situation in the USA is not quite as robust as it appears at first glance.” There has been a lot of discussion in the past few weeks and months about the increasing breadth that the upswing on the stock markets driven by the positive AI effects has now gained. “Measured against the equally weighted S&P 500, in which the index representatives are included regardless of market capitalization, there is currently not much left of this,” says Hettler.
The equally weighted S&P 500 has lost more than two percent since the end of August. The capital-weighted S&P 500 gained more than two percent over the same period. According to Hettler, this is solely due to the tech companies Microsoft, Nvidia, Apple, Meta and Amazon: “This means that the other 495 index members have actually put a strain on the S&P 500.”
However, the development is also good news for the stock market. It shows that investors are by no means as euphoric about the situation of individual companies as a first glance at the indices suggests. This makes it conceivable that the remaining 495 companies will catch up if they exceed analysts' expectations.
If this surprise does not materialize, investors will have to hope for a now proven pattern. In this case, the big tech companies would have to keep the rest of the stock market up.
