The U.S. stock market experienced a difficult summer, and it seems to have cast a shadow on the most popular earnings season for American companies in many years. Despite the fact that $Tesla (TSLA.US)$And.$Amazon (AMZN.US)$The component stocks that exceeded profit expectations showed a median differential of 1.7% over the benchmark index on the day of the results release, which was the largest gap for Bloomberg Intelligence since 2019. The component stocks that did not meet expectations showed a median differential of only 1.1% behind the index, which was one of the narrowest gaps during that period.$S&P 500 Index (.SPX.US)$Earlier, analysts believed that the company had announced "excellent" results at a time when the fast food industry was "collapsing", making it one of the most noteworthy increases during this earnings season. Subsequently, DoorDash rose 8.4%. Barbie doll manufacturer Mattel rose 10% on July 24 due to its impressive profit margin, and reached a historical high on July 12 after releasing better-than-expected results. Since the proportion of companies with higher-than-expected sales is also at its lowest level since 2019, Wall Street professionals are curious about how long the profit margin can be maintained. Companies with lower-than-expected profit margin are hit: after lower-than-expected profit margin was announced, Tesla fell 12%, and after disappointing performance was announced, both of them fell 20% and 13% on Wednesday.

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."

But in most cases, investors are more tolerant than usual of stocks that fall below expectations. For example, GE HealthCare Technologies lowered its expectations, and the analysts said it largely met expectations, and then the stock price rose 2.4%; The stock price rose 4.1% after a significant reduction in annual organic sales targets, as the company expects no further significant declines, which has relieved investors.$DoorDash (DASH.US)$Mattel$Mattel (MAT.US)$it rose 10% on July 24 due to its impressive profit margin.$Bank of New York Mellon (BK.US)$It reached a historical high on July 12 after releasing better-than-expected results.

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 with higher-than-expected sales is also at its lowest level since 2019, Wall Street professionals are curious about how long the profit margin can be maintained. Companies with lower-than-expected profit margin are hit: after lower-than-expected profit margin was announced, Tesla fell 12%,$Super Micro Computer (SMCI.US)$And.$Airbnb (ABNB.US)$Both of them fell 20% and 13% on Wednesday after disappointing performance was announced.

But in most cases, investors are more tolerant than usual of stocks that fall below expectations. For example, $GE HealthCare Technologies (GEHC.US)$lowered its expectations, and the analysts said it largely met expectations, and then the stock price rose 2.4%;$The Kraft Heinz (KHC.US)$The stock price rose 4.1% after a significant reduction in annual organic sales targets, as the company expects no further significant declines, which has relieved investors.

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."

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