Earnings Preview: US and Europe

Market Overview

Stocks have shown remarkable resilience throughout the year, managing to navigate through geopolitical turmoil, energy price spikes, and rising global bond yields that have increased borrowing costs. US blue-chip stocks are currently in their fourth year of a bull market, but they are now facing a significant challenge with the upcoming Q4 earnings updates.

Expectations for Earnings Growth

According to FactSet, the headline expectations for earnings growth are 35% for the S&P 500 and 19%-20% for the Eurostoxx 600 index. These figures are heavily influenced by advancements in AI and the energy sector, with the S&P 500's energy sector expected to rise by 115% and AI-linked US companies projected to exceed 65% growth.

Will Earnings Exceed Expectations?

If the S&P 500 achieves earnings growth above 35% for Q3, it would mark the eighth consecutive quarter of double-digit growth. In Europe, earnings momentum remains strong, with a 24% expansion in Q2 and expectations for continued growth.

Factors Supporting Strong Earnings Outlook

• Analysts have been revising Q3 estimates upward since June, a typically bullish sign.
• 72 out of 113 S&P 500 companies that provided guidance in Q2 expect positive earnings growth.
• Historically, S&P 500 companies have exceeded earnings estimates by over 7.5% on average.
• No sector in the S&P 500 is expected to report negative earnings, which is notable given the current economic climate.

Market Dynamics

While the earnings outlook appears strong, concerns about rising interest rates and persistent inflation pose risks to the stock market. The S&P 500's path to 8,000 hinges on another quarter of robust earnings growth, with Q4 forecasts needing to be equally impressive.

European Earnings Insights

In Europe, earnings growth is primarily driven by the energy sector, expected to grow by over 98%. Excluding this sector, Q3 earnings growth is more modest at 9-10%. Interest rate-sensitive sectors, particularly real estate, are anticipated to face declines in earnings due to rising bond yields.

Foreign Exchange Impact

European stocks have lagged behind US counterparts, partly due to limited exposure to AI. The euro has depreciated by over 3% against the USD in the past three months, which may negatively impact earnings for European exporters.

Key Considerations for Earnings Season

• Maintaining profit margins will be crucial, especially for US hyperscalers investing heavily in AI infrastructure.
• Capex guidance and AI spending will be closely monitored, with major firms expected to invest significantly in AI.
• Oil and gas companies are likely to report strong earnings due to geopolitical factors, but future revenue growth remains uncertain.
• Q4 guidance will be critical for stock market reactions, with analysts expecting strong earnings growth.
• Bank earnings will provide insights into consumer health and the broader economy.
• Investors will be looking for earnings strength outside of the tech sector, as cyclical and interest-rate sensitive sectors may show weaknesses.

Upcoming Earnings Reports

• JP Morgan: 13th October
• ASML: 14th October
• TSMC: 15th October
• Shell: 29th October
• Meta: 28th October
• Alphabet: 27th October
• Apple: 2nd November
• Nvidia: 25th November
• Amazon: 29th October
• Tesla: 21st October