According to the Smart Finance app, the US stock market experienced a difficult summer, casting a shadow on the most popular earnings season for American companies in years. Despite significant selling of companies such as Tesla (TSLA.US) and Amazon (AMZN.US), on the day of the earnings announcement, the S&P 500 index components with higher-than-expected profits had a median reaction 1.7% higher than the benchmark index, the largest gap since Bloomberg Intelligence since 2019. The median reaction of the non-expected component stocks was only 1.1% below the index, one of the smallest gaps in the same period.

Therefore, as an unofficial prelude to this round of earnings season, although the S&P 500 index has fallen more than 7% since JPMorgan announced its earnings on July 12, the market is still rewarding some companies that fulfill their promises.

This trend is also a response to the strongest profit growth of American companies in the past three years (measured by absolute value). Although the S&P 500 index components faced higher expectations than usual as earnings season approached, overall they still exceeded expectations, with profits growing 13% in the second quarter. According to BI data, this is the largest increase since the fourth quarter of 2021. This will also help alleviate concerns about the cooling of inflation leading to weak consumer demand and weakened pricing power.

"No room for complaints"

Gina Martin Adams, chief equity strategist at BI, said: "There is no room for complaints in terms of earnings for S&P 500 index component companies." She wrote in a report published on Monday entitled "Stop blaming S&P's plight on earnings": "Although the situation where revenue is lower than expected is more common than usual, the current momentum of guidance is positive."

Previously, analysts believed that DoorDash(DASH.US) released "excellent" earnings at the collapse of the fast food industry. It became one of the most eye-catching surges during this earnings season, and then soared 8.4%. Mattel (MAT.US), the manufacturer of Barbie dolls, rose sharply by 10% on July 24 due to its impressive profit margin, and Bank of New York Mellon (BK.US) reached a historical high on July 12 after releasing earnings that exceeded expectations.

However, the S&P 500 index does not seem to have received considerable returns from this strong quarter. On the contrary, the stock market is concerned about the overvaluation of high-tech companies caused by the AI frenzy and the concern that the Fed's rate cut is too slow to prevent an economic recession.

Since the proportion of companies whose sales exceeded expectations is also the lowest since 2019, Wall Street professionals are curious about how long profit margins can be maintained. Stocks of companies with disappointing profit margins or expectations were affected: Tesla fell 12% after lower-than-expected profit margins on July 24, and after disappointing performance, Super Micro Computer (SMCI.US) and Airbnb (ABNB.US) fell 20% and 13% respectively on Wednesday.

But in most cases, investors are more tolerant of stocks that fall below expectations than they used to be. For example, after GE HealthCare Technologies (GEHC.US) lowered its expectations, analysts said it was largely in line with expectations, and then the stock price rose by 2.4%; after Kraft Heinz (KHC.US) sharply lowered its annual organic sales targets, the stock price rose by 4.1%, because the company expects There will be no further significant decline, which has relieved investors' concerns.

Still a flexible prospect

Although people are generally worried about the impact of economic contraction, Scott Chronert, a strategist at Citigroup, said that his expectations for this year's earnings have not changed.

Chronert said, "We are still satisfied with the profit estimates of the S&P 500 index components, but we also acknowledge that there may be some risks if a traditional recession occurs." He added that the team's model shows that profit growth in 2024 is "likely" to reach about 10%, and it will increase further next year.

According to BI data, analysts currently expect earnings to increase by 8.5% and 14.2% in 2024 and 2025, respectively.

Meanwhile, JPMorgan's data shows that the good trend of US companies this quarter has not yet spread to Europe. Stocks in the STOXX 600 index components in Europe that have lower-than-expected profits underperformed the benchmark index by 2.2%, the largest gap since at least 2016. On the other hand, stocks with better-than-expected profits were only 1.6% higher than the benchmark index.

Chris Hart, the portfolio manager of Boston Partners, said: "American investors are highly optimistic, while European investors are often relatively pessimistic. However, the valuation of US stocks is much higher, and from a medium-term perspective, the pendulum begins to swing back to Europe, possibly waiting for a time when the valuation is extremely attractive."