There is an unusual divergence in the earnings outlook for U.S. companies: while analysts have lowered expectations, company guidance points to another strong quarter. Analysts expect a 4.2% year-over-year increase in earnings for S&P 500 companies in the third quarter, down from the 7% forecasted in mid-July. On the other hand, the guidance from these companies suggests a growth of about 16%.

Gina Martin Adams, Chief Equity Strategist at BI, said that this difference is "unusually large," and the significantly stronger outlook indicates that "companies should easily exceed expectations."

She wrote in a report: "As companies emphasize efficiency in the face of economic uncertainty, profit margins should continue to rise." The momentum of earnings per share guidance has also turned positive, with the BI model showing a score of 0.14 for the three months ending in September, compared to an average of 0.03 after the COVID-19 pandemic.

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Meanwhile, Citi's earnings revision index for September shows a strong negative momentum, falling to its lowest level since December 2022. Despite analysts' concerns, the S&P 500 index reached a new high last Friday, with a cumulative increase of 22% since 2024, setting the best start-of-year record since 1997.

This indicates that investors are not intimidated by the lowered forecasts but are betting that this quarter's earnings will once again bring positive surprises, just like in the first quarter, when the expected growth was 3.8%, and the result was 7.9%.

The new round of earnings season started well. JPMorgan Chase reported an unexpected increase in net interest income for the third quarter and raised expectations for this main source of revenue. The stock rose about 4.5% after the earnings announcement on Friday, and Wells Fargo rose 5.6%, showing that the impact of the decline in interest rates is not as bad as people feared.

Michael Wilson, a strategist at Morgan Stanley, wrote in a report on Monday: "Before the earnings season, several large bank stocks had de-risked in mid-September. This led to lower performance expectations for this quarter. The initial results of the earnings season indicate that banks are breaking through this expectation."

Of course, there are some warning signs. Earlier this month, before the appointment of new CEO Elliot Hill, Nike readjusted Wall Street's expectations and withdrew its full-year sales guidance. At the end of September, FedEx's stock price plummeted after warning of a slowdown in business over the next year.

Bank of America strategists Ohsung Kwon and Savita Subramanian wrote in a report last week: "Now that the easing cycle has begun, the main focus is on the prospects of companies on the other side of the curve." They lowered their 2024 S&P 500 earnings per share forecast from $250 to $243. "Expectations are not high. As long as companies can overcome macro headwinds and see early signs of improvement from rate cuts, stocks should be rewarded."

Investors' attention will eventually turn to the "seven giants" stocks that have driven the stock market this year, including Apple and Nvidia. The market generally expects that the profits of these companies will grow by about 18% compared to the same period last year, with a slowdown in growth (36% in the second quarter). Since the second quarter earnings season, the stock prices of these companies have been underperforming, and they have been consolidating recently as the S&P 500 index's rise expands.Wilson stated: "The fundamental reason for the 'Seven Titans' underperformance may simply be the slowdown in earnings per share growth from last year's robust increase." "If earnings revisions show that the tech giants are relatively strong, these stocks may once again perform well, and the S&P 500's lead could narrow—just as it did in the second quarter and throughout 2023."