The financial reporting season that officially kicked off last week saw a divergence between Wall Street and the leadership of listed companies on profit prospects, with analysts lowering expectations while corporate guidance indicates continued strong profitability.

Bloomberg Industry Research (BI) compilation data shows that analysts expect that in the third quarter of this year,$S&P 500 Index (.SPX.US)$the earnings of component companies will increase by 4.2% compared to the same period last year, lower than the 7% year-on-year growth forecasted in mid-July. However, the expectations of these component companies themselves imply a profit growth of about 16%, nearly four times the growth rate expected by analysts.

BI's Chief Stock Strategist Gina Martin Adams said that the above-mentioned divergence in expectations between listed companies and Wall Street is 'unusually large', with the clearly strong outlook indicating that 'companies (performance) should easily exceed (Wall Street's) expectations'.

Last Friday, several major US banks that kicked off the earnings season made a good start. The reports showed that despite the Fed's significant 50 basis point rate cut in September, JPMorgan's net interest income (NII) in the third quarter continued to exceed expectations, and the bank also raised its full-year revenue outlook. Wells Fargo & Co's NII declined by 11% year-on-year, lower than expected, but revenue and profits were well above expectations.

Mike Wilson, Chief US Stock Strategist at the well-known Wall Street bear Morgan Stanley, wrote in a report released this Monday: 'Before the earnings season arrived, several major bank stocks had already reduced risk in mid-September. This has lowered the threshold for expectations this quarter. Preliminary results of the earnings season show that banks are surpassing this (expectation) threshold.'

After two major banks released their financial reports last week, Wall Street News mentioned that some analysts believe the strong financial reports of large banks may indicate that the US economy has achieved a so-called 'soft landing.' Some analysts have stated that during interest rate cuts and the achievement of a soft landing, financial stocks often perform well.

However, bank earnings reports may suggest that the US economy is not landing. Not landing usually refers to the scenario where the economy, after high growth, does not experience the expected slowdown or recession, but continues to maintain strong growth momentum, while inflation levels are not effectively controlled, leading to a situation where the Federal Reserve has almost no room to cut interest rates. Stocks benefit from strong economic performance on one hand, while also facing pressure from rising risk-free interest rates, resulting in overall volatile trends.

JPMorgan Chase had an excellent performance in the third quarter, with revenues and profits both higher than expected. Meanwhile, consumer spending remained robust, credit conditions moderately loosened, and expected inflation relief and interest rate cuts have all provided support for the scenario of the US economy not landing.

As the earnings season continues, investors' attention will eventually shift to the seven technology giants that have been the main drivers of the rise in US stocks this year - including $Apple (AAPL.US)$N/A.$NVIDIA (NVDA.US)$,$Microsoft (MSFT.US)$Alphabet, the parent company of Google $Alphabet-A (GOOGL.US)$N/A.$Amazon (AMZN.US)$Meta Platforms, the parent company of Facebook $Meta Platforms (META.US)$N/A.$Tesla (TSLA.US)$The so-called 'Big Seven' of US stocks, including the 'Mag 7'. Since the second quarter financial reports were released, the overall performance of the 'Big Seven' stocks has been weaker than the large cap, with the s&p 500 index expanding, while they consolidate in a sideways pattern.

The current market consensus expectation is that the third-quarter profits of the 'Magnificent Seven' will overall grow by about 18% year-on-year, a slowdown from the 36% growth rate in the second quarter.

Morgan Stanley's Wilson believes: "The fundamental reason for the underperformance of the 'Magnificent Seven' may simply be the slowdown in earnings per share (EPS) growth compared to last year's very strong growth. If profit revisions show that the 'Magnificent Seven' are relatively strong, these stocks may perform well again, narrowing the lead gap of the large cap compared to them - just like in the second quarter of this year and throughout 2023."

Editor/Somer