Can broadening earnings growth sustain the equity upcycle? JPM weighs in

Investing.com -- Third-quarter earnings should reassure investors, JPMorgan strategists say, with earnings strength broadening beyond AI, though many investors worry that results will underwhelm after weeks of market volatility.

Strategists led by Mislav Matejka said that while investors have a constructive view on earnings, "we believe that earnings will be a support for the market." The team said expectations look elevated at face value but are more reasonable beneath the surface.

For the S&P 500, consensus expects Q3 EPS growth of 24%, according to IBES. FactSet and LSEG are at 30%, due to an adjustment for a one-off tax charge at Meta. Excluding Nvidia and Micron, the hurdle falls to 15%, and for the median stock it drops to 8%.

European consensus stands at 19% growth, falling to 11% excluding energy, with a median of 9%. Median revenue growth is 7% for both the S&P 500 and the Stoxx 600.

JPMorgan pointed to global PMIs, which accelerated during the quarter to multi-year highs and point to strong earnings. Its lead indicator of earnings is still trending up and typically leads by two quarters, suggesting at least the next two reporting seasons should be positive.

"AI continues to do the heavy lifting for the U.S. At the same time, earnings strength is broadening," the strategists wrote. The share of global stocks with accelerating earnings is near a record, which should improve the odds of a sustainable upcycle.

In Europe, margin expansion is doing the heavy lifting, with EBIT-to-sales projected at 14.4% this year, 250 basis points above 2019. All sectors are stepping up except staples, autos and software.

A weaker euro should support exporters, the strategists continued, and energy is likely to surprise to the upside. Miners present a risk, and China and consumer exposure may stay soft, with companies likely to flag rising energy costs.

Semiconductors and industrials are also poised for strong results, while banks have derated more than 10% in recent weeks but should deliver reassuring earnings. French stocks have derated more than 15% even as earnings hold up, and the CAC 40 gets 75% of its revenue outside France, the strategists noted.

Meanwhile, the bond yield spike is approaching oversold territory. If yields peak as results start, equities could advance into year-end with "risk-on internals," the strategists said. JPMorgan remains positive on European semiconductors, banks, chemicals and industrials.

"Overall, we have been arguing that when the Q3 results season starts, the market focus will shift onto still supportive fundamentals, and move on from September’s volatility," the team concluded.

Original Article

You May Also Be Interested In

• Tesla stock up as automotive gross margin improves, free cash flow turns positive
• Oceaneering (OII) Misses Q3 EPS by 9c
• United Bancshares (UBOH) Misses Q3 EPS by 190c