JPMorgan strategists expect third-quarter corporate earnings to provide renewed support for the stock market, as profit growth expands beyond artificial intelligence-related companies. Despite recent market volatility and concerns about disappointing results, the investment bank believes underlying fundamentals remain encouraging.
A team of strategists led by Mislav Matejka acknowledged that earnings expectations appear demanding. However, they argued that a closer examination reveals more achievable targets, potentially allowing corporate results to support the ongoing equity market rally.
S&P 500 Earnings Growth Expectations Remain Strong
According to IBES estimates, analysts expect S&P 500 earnings per share (EPS) to increase by 24% in the third quarter.
Meanwhile, FactSet and LSEG projections indicate growth of approximately 30%, reflecting an adjustment related to a one-time tax charge at Meta.
However, excluding semiconductor giants Nvidia and Micron reduces expected earnings growth to 15%. For the median S&P 500 company, the anticipated increase falls further to 8%, suggesting that headline expectations are heavily influenced by a handful of major companies.
European earnings estimates also remain encouraging. Consensus forecasts point to 19% profit growth, declining to 11% when excluding the energy sector. Median earnings growth stands at 9%.
Additionally, median revenue growth is expected to reach 7% for companies in both the S&P 500 and Europe’s Stoxx 600 index.
Broader Earnings Growth Could Extend the Stock Market Rally
JPMorgan highlighted improving global economic indicators as another reason for optimism.
Global Purchasing Managers’ Index (PMI) readings accelerated during the third quarter, reaching multi-year highs and signaling stronger business activity.
The bank’s proprietary earnings indicator also continues to move higher. Historically, this measure has anticipated corporate earnings trends by approximately two quarters, suggesting that the next two reporting seasons could remain positive.
Artificial intelligence continues to drive a substantial portion of US corporate profit growth. Nevertheless, JPMorgan sees increasing evidence that earnings momentum is spreading across a wider range of industries.
The proportion of global companies reporting accelerating earnings growth is approaching record levels. According to the strategists, this broader participation improves the prospects for a sustainable equity market upcycle.
European Stocks Benefit From Improving Profit Margins
In Europe, expanding corporate profit margins remain a major contributor to earnings performance.
JPMorgan expects earnings before interest and taxes (EBIT) as a percentage of sales to reach 14.4% this year. That represents an improvement of 250 basis points compared with 2019.
Most European sectors are expected to benefit from stronger margins, although consumer staples, automobiles, and software remain notable exceptions.
A weaker euro could also provide additional support to European exporters by improving their competitiveness in international markets.
Meanwhile, energy companies may deliver better-than-expected results. However, mining stocks face potential downside risks, while businesses exposed to China and consumer spending could experience continued weakness.
Higher energy expenses may also emerge as a recurring concern in corporate earnings reports.
JPMorgan Favors Banks, Semiconductors and Industrials
Several European industries appear positioned to deliver solid third-quarter earnings, particularly semiconductors and industrial companies.
European banks have experienced valuation declines exceeding 10% in recent weeks. Nevertheless, JPMorgan expects their upcoming financial results to reassure investors.
French equities have also suffered valuation declines of more than 15%, despite relatively resilient earnings fundamentals.
The strategists emphasized that approximately 75% of CAC 40 company revenues originate outside France, potentially limiting the direct impact of domestic economic uncertainty on corporate performance.
JPMorgan maintains a positive outlook on European semiconductors, banks, chemicals, and industrial stocks.
Could Strong Earnings Push Stocks Higher Into Year-End?
Beyond corporate results, developments in government bond markets could play an important role in determining the next direction for equities.
JPMorgan believes the recent surge in bond yields may be approaching exhaustion. If yields peak around the beginning of earnings season, improving market conditions could encourage investors to increase their exposure to risk assets.
Such a development could help equities recover from September’s volatility and potentially extend their gains toward the end of the year.
The bank expects investors to gradually shift their attention away from short-term market turbulence and toward supportive corporate fundamentals as third-quarter results emerge.
Overall, JPMorgan’s outlook suggests that expanding earnings growth, improving business activity, and resilient profit margins could provide the foundation for a more sustainable stock market rally.
