Wall Street is Feeling Better Than Usual About Q2 Earnings. Will Companies?

As corporate America gears up to report second-quarter results this week, many consumer goods remain expensive, borrowing money is still challenging, and buying a home is difficult. The upcoming U.S. election has occasionally stirred markets, especially as signs emerge that voters may be turning away from President Joe Biden following his weak performance in last month’s debate against Donald Trump.

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However, as major companies like JPMorgan Chase & Co. and Delta Air Lines Inc. kick off earnings reports, Wall Street analysts predict that profit growth for many large corporations will be robust. Among the S&P 500 companies, profit per share for the second quarter is expected to see its best growth rate since early 2022, when Russia’s invasion of Ukraine initially drove up food and energy prices. Profit margins are also anticipated to approach the levels seen in that tumultuous year and in 2021.

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Analysts typically lower their profit estimates as companies near their quarterly reports. This practice, seen either as a tempering of optimism or a strategy to make it easier for companies to surpass expectations, has been less pronounced this quarter.

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“The fact that estimates have come down so little tells us that management teams and analysts have more conviction and confidence in the demand environment,” said Sheraz Mian, research director at Zacks, in an interview.

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Wall Street currently expects S&P 500 companies to achieve earnings per share growth of 8.8%, according to a FactSet report. If this figure holds, it would represent the largest gain since the first quarter of 2022, which saw a 9.4% increase. Profit margins are projected to be 12% for these companies. Some economists suspect that companies have kept prices high to maintain these margins, despite consumer struggles.

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These gains are partly due to easier comparisons to last year, as cost cuts improve the bottom line. Additionally, they are driven by a few large technology companies, whose stock prices and profits have benefited from artificial intelligence hype.

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JPMorgan’s results will offer an early view of the overall economy following a significant rally in big-bank stocks and the broader market this year. However, this upward trend might make investors less forgiving if companies fall short of expectations.

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The Federal Reserve's sentiment on cutting interest rates, potentially stimulating buying and borrowing, remains mixed. Friday’s June jobs report could clarify the Fed’s direction toward a possible interest rate cut later this year.

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JPMorgan CEO Jamie Dimon suggested in May that if interest rates stabilize or decline slightly, the banking industry would likely be fine. However, he warned that stagflation—higher prices combined with lower economic growth—could surprise many globally. “The surprise will be stagflation,” Dimon said. “I’m not saying it’s going to happen. I just give the odds much higher than other people. I look at the amount of fiscal and monetary stimulus that’s taken place over the last five years as being so extraordinary.”

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Delta Air Lines’ results will come as some airlines report weakening travel demand. Recent results from Nike Inc. and Walgreens Boots Alliance Inc. have not indicated strong consumer confidence.

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Following the debate, there have been signs of a revival of the “Trump trade,” with some polls showing a post-debate lead for Trump. Biden has stated he will not drop his bid for a second term despite growing pressure.

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Yields on government bonds rose after the debate, as traders anticipated higher prices and debts under Trump’s proposed tax cuts and tariffs. Analysts at Keefe, Bruyette & Woods noted an increase in smaller bank stocks, as some investors bet on deregulation and more mergers and acquisitions.

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Mian, however, believes the recalibration of investor bets is unlikely to affect earnings call discussions in the coming weeks. “When the conventions come around, then it’s really front and center,” he said. “Then everybody starts crunching the data for the what-if scenarios for this side versus the other.”

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This week, ten S&P 500 companies, including one Dow member, will report results, according to FactSet. Delta and the big banks will dominate market attention, but PepsiCo Inc. and Conagra Brands Inc. will also report as consumers deal with higher grocery bills.

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Key calls to watch include those from JPMorgan, Citigroup Inc., and Wells Fargo & Co., which will report quarterly results on Friday. These results follow the Fed's stress tests, which showed big banks are well-positioned to handle a severe recession, although they would endure greater losses than last year's test.

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Concerns remain about consumers’ ability to keep up with credit-card and loan payments. Banks are trying to reduce exposure to office real estate lending, which has been disrupted by remote work, and smaller banks face higher risks in this area.

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“The larger banks are more diversified, they have less of it,” said Christopher McGratty, a bank analyst at Keefe, Bruyette & Woods. “The smaller banks are more concentrated and have more of it. So the margin of error for the smaller banks is lower.”

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Bank analysts at Oppenheimer described the outlook for net-interest income as largely intact, noting that “the watchword for the quarter is ‘boring,’ and that is a good thing.” They added, “Loan growth is slow, but as expected. Credit is normalizing, as expected, but still excellent. Deposit costs are still inching up, but as expected.”

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Delta Air Lines, reporting on Thursday, has avoided major investor concerns partly by upselling to wealthier travelers. Delta’s earnings call will likely focus on its premium seating classes and its partnership with American Express Co. Analyst Helane Becker noted Delta’s likely stronger operating margins compared to rivals but also pointed to increased competition and discounted fares. “We believe premium demand is still outpacing main cabin demand,” she said. “While traffic has continued to be strong, our checks also indicate elevated discounting, especially by American and Southwest.”

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