Profit broadening beyond AI seen supporting stocks in Q3, JPMorgan says

JPMorgan's call advocates for expanding equity exposure rather than narrowing it, pointing to a near-record number of stocks with accelerating earnings, which suggests that market leadership does not have to be concentrated in a few AI companies. In Europe, the recent derating of banks and French equities has lowered the bar heading into results, creating room for relief rallies if earnings simply hold steady. The bond market remains a key variable: if yields peak as earnings season begins, that would eliminate the main headwind to valuations, whereas a further rise would challenge the thesis. Companies highlighting rising energy costs also link the earnings outlook to crude oil, meaning that any renewed spike in oil prices poses a direct threat to European margins.

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• US stocks close mixed

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According to JPMorgan, the headline earnings hurdle appears more intimidating than it actually is, and once results begin to appear, the nervousness of September should yield to fundamentals that remain intact.

Summary:

• JPMorgan strategists, led by Mislav Matejka, anticipate that third-quarter earnings will bolster markets, with strength extending beyond AI, even though investors are concerned following weeks of volatility.
• On IBES data, the S&P 500 consensus points to Q3 EPS growth of 24%; on FactSet and LSEG, the figure is 30% after adjusting for a one-time Meta tax charge. Excluding Nvidia and Micron, the growth rate drops to 15%, and to 8% for the median stock.
• In Europe, consensus stands at 19%, falling to 11% when energy is excluded, with a median of 9%. Median revenue growth is 7% for both the S&P 500 and the Stoxx 600.
• Global purchasing managers indexes reached multi-year highs during the quarter, and JPMorgan's lead indicator suggests at least two more positive earnings seasons ahead.
• European margins are projected at approximately 14% of sales this year, 250 basis points above 2019 levels. Energy is expected to outperform, while miners, China, and consumer exposure could underperform.
• JPMorgan remains bullish on European semiconductors, banks, chemicals, and industrials, and believes a peak in bond yields could pave the way for equity gains through year-end.

JPMorgan strategists say that third-quarter earnings ought to reassure investors and provide support for equities, as profit gains are broadening beyond artificial intelligence, even though many investors worry results may fall short after weeks of market turbulence.

The team, headed by Mislav Matejka, noted that investors already have a constructive outlook on earnings, but insisted that results would still support the market. At first glance, expectations seem high, the strategists said, but they look more reasonable upon deeper examination. According to IBES data, consensus for S&P 500 earnings per share growth in the quarter is 24%. FactSet and LSEG report 30% after adjusting for a one-time tax charge at Meta. Without Nvidia and Micron, the growth threshold declines to 15%, and to 8% for the median stock.

In Europe, the consensus projects 19% growth, which falls to 11% when energy is removed, and a median of 9%. Median revenue growth is 7% for both the S&P 500 and the Stoxx 600.

JPMorgan referenced global purchasing managers indexes, which gained momentum in the quarter to reach multi-year highs, aligning with robust earnings. The bank's own earnings lead indicator continues to climb and generally leads by about two quarters, implying that at least the next two earnings seasons should be favorable, according to the strategists. AI remains a major driver in the US, they said, but the proportion of global stocks with accelerating earnings is near a record level, which should boost the likelihood of a sustained upcycle.

In Europe, margin expansion is the primary driver, with operating margins expected around 14% of sales this year, roughly 250 basis points higher than in 2019. All sectors except staples, autos, and software are showing improvement. A weaker euro should benefit exporters, and energy is likely to exceed expectations. Miners pose a risk, China and consumer exposure might stay weak, and companies are expected to highlight rising energy costs.

The strategists also anticipate strong performance from semiconductors and industrials. Banks have experienced derating—their valuation multiples have dropped—by over 10% in recent weeks, yet they should still deliver reassuring earnings. French equities have derated by more than 15% even though profits remain stable, but the CAC 40 generates three-quarters of its revenue outside France.

Looking forward, JPMorgan stated that the recent surge in bond yields is approaching oversold conditions. If yields reach a peak as earnings season starts, equities could rise into the end of the year with risk-on characteristics, the strategists said. The bank maintains a positive stance on European semiconductors, banks, chemicals, and industrials, and expects market attention to move away from September's volatility toward fundamentals that remain constructive.