Key points:

  • According to JPMorgan, companies are generally showing a decline in profits, particularly in the third quarter.
  • A group of major tech companies was the main driver of stock market growth last year.
  • The most significant earnings decline is observed in cyclical sectors such as commodities, industrials, and consumer goods.

JPMorgan strategists expressed serious concerns about a noticeable decline in profits across all key regions during the third quarter. They noted a persistent downward trend in both the U.S. and the Eurozone, highlighting growing worries about the slowdown in gross profit growth and increasing macroeconomic uncertainty.

The “Magnificent Seven” is the driver of stock market growth

In a report published on Monday, the Wall Street investment firm significantly lowered its profit forecast for companies in the S&P 500 index. The document highlights a reduction in expected profitability for the third quarter, signaling lower expectations for potential positive surprises from corporate financial results.

Despite this reduction, overall forecasts for annual earnings per share (EPS) growth for the third quarter have been revised downward, from 8% to just 4%, compared to estimates made several months ago.

Particularly noteworthy is that the EPS growth forecast for companies outside the “Magnificent Seven” – the major tech giants – stands at just 1.4%. This indicates a significant slowdown compared to the 5% growth seen in the previous quarter.

The “Magnificent Seven” companies, the main driver of S&P 500 profits last year, are now experiencing slower growth. JPMorgan expects this group’s earnings to grow by 17% year-over-year in the third quarter, which is half of the growth seen in the second quarter and a third of the growth recorded in the fourth quarter of 2023.

Lower expectations for other sectors

JPMorgan analysts note that the earnings decline is mainly concentrated in cyclical sectors of the economy, particularly in commodities, industrials, and consumer segments. The financial sector, however, showed positive dynamics, while defensive sectors like utilities and real estate posted more stable results.

European companies faced a more significant decline in earnings compared to their U.S. counterparts. Profit growth forecasts for the Eurozone have been sharply downgraded. The energy and automotive sectors are the primary contributors to this lag.

The JPMorgan report raises concerns about future financial results for companies. The deterioration of global economic indicators and signs of slowing economic growth increase the likelihood of further profit declines.

Analysts point to a strong correlation between oil prices and sales growth, suggesting a potential decrease in profits. Additionally, a substantial number of companies have already issued profit warnings ahead of the earnings season, triggering a negative reaction from investors.

JPMorgan warns that even with lowered expectations, a positive market response to corporate earnings reports is not guaranteed. The bank emphasizes the need for further revisions to profit forecasts to maintain current price-to-earnings multiples.

JPMorgan strategists maintain a cautious outlook on sectors such as chemicals, luxury goods, industrials, automotive, semiconductors, and mining. Weak earnings revisions and potentially disappointing third-quarter results may lead to reduced investor interest in these sectors.