5 Themes to Watch in New US Earnings Season

As the new earnings season kicks off, the strong gains in U.S. stocks this year may face their biggest test. Data from Bloomberg Intelligence shows that strategists predict S&P 500 companies will report the weakest earnings in the past four quarters, with profits growing by only 4.3% year-over-year in the third quarter.

Despite the lowered earnings expectations, the S&P 500 index still hit a new high last Friday, with a cumulative increase of 22% so far in 2024. Investors who are bullish on U.S. stocks may have a point, as there seems to be room for a surprise increase in profits if these revised expectations prove to be too pessimistic. This situation occurred in the first quarter when the earnings expectations were for a year-over-year increase of 3.8%, but the result was a year-over-year increase of 7.9%.

Baird investment strategist Ross Mayfield said, "Analysts have cut earnings per share expectations by a larger margin than usual, which could lead to a higher probability of beating expectations and better stock market performance."

Here are five key themes for investors to watch during the third-quarter earnings season:

1. Deceleration in earnings growth of tech giants

Most of the earnings growth for S&P 500 companies still comes from large technology companies, which are seen as the main beneficiaries of artificial intelligence development. The so-called "U.S. stock market's seven giants"—Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla—are expected to see an 18% increase in profits in the third quarter. However, data from Bloomberg Intelligence shows that the problem is that the earnings growth rate of these tech giants is slowing down, below the more than 30% seen in 2023.

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In addition, data shows that profits for other S&P 500 companies, excluding the "U.S. stock market's seven giants," are expected to grow by 1.8% in the third quarter, marking a second consecutive quarter of growth, albeit a small increase. Data from Bloomberg Intelligence shows that earnings growth for the remaining 493 companies in the S&P 500 is expected to accelerate significantly from now on, with a double-digit increase expected in the first quarter of 2025.

2. A paradise for stock pickers

Investors may anticipate some significant fluctuations in certain individual stocks, which will not be reflected in the broad market index. The options market is pricing the largest average earnings implied volatility at the single stock level since Bank of America began collecting data in 2021. However, Bank of America equity strategist Ohsung Kwon said that the implied volatility at the index level is relatively low, indicating that this earnings season could be a "paradise for stock pickers."

Among the 11 sectors of the S&P 500 index, three sectors—technology, communication services, and healthcare—are expected to see profit increases of more than 10%. On the other hand, the energy sector is expected to report a drop of over 20%. British investment bank (BI) Chief Equity Strategist Gina Martin Adams said that due to the sharp drop in crude oil prices last quarter, the profit expectations for the energy sector are the largest decline among the 11 sectors.3. Profit Margins

Wall Street professionals will be closely monitoring profit margins, a key indicator of how effectively businesses are generating profits. Data indicates that profit margins for the third quarter are expected to decline to around 12.9%, lower than the 13.1% in the second quarter, but slightly higher than the 12.8% of the third quarter in 2023. This slight decrease reflects the challenges some companies face in passing on input costs to consumers, as wage pressures persist in low-productivity industries where automation is difficult to achieve.

Data from Bloomberg Intelligence shows that profit margins for energy and real estate stocks will be the lowest, but from a broader perspective, a rebound is expected in the coming quarters.

4. Turbulent European Markets

In Europe, the new round of earnings seasons may mark a turning point for the pan-European Stoxx 600 index, which is currently hovering near historical highs. Due to weak economic growth in the Eurozone, analysts have downgraded earnings expectations for companies in the index.

Although the downgraded earnings expectations lower the bar for exceeding expectations, the forecasts for 2025 remain high, and any guidance on weakening consumer demand will force these predictions to be revised downward, further affecting company stock prices. Many well-known companies, including Swedish clothing retailer Hennes & Mauritz AB and Volkswagen, have issued profit warnings in recent weeks.

5. Election Focus

With only a few weeks left until the U.S. elections, investors will listen to corporate executives' views on economic and trade policy risks, as well as other political issues. Data from Bank of America shows that about 110 companies mentioned the word "election" in their second-quarter earnings calls, a 62% increase from four years ago.

Bank of America equity strategist Ohsung Kwon stated that history indicates that corporate investment activity accelerates after the U.S. elections, which could be a catalyst for companies to release capital in the coming quarters, especially with declining interest rates.

However, companies may also postpone some expansion plans and other expenditures. Jeff Buchbinder, Chief Equity Strategist at LPL Financial, said, "Nowadays, so much capital investment is related to artificial intelligence, and the election is unlikely to suppress this. However, with the election so close, due to political uncertainty, some more traditional capital commitments may be postponed."