As we approach the fourth quarter earnings season of 2024, the capital market is intensely focused on corporate profit performanceGiven the intricacies of the current economic landscape, expectations for this earnings season adopt a rather unique stance characterized by a blend of caution intertwined with potential surprises.

Investor sentiment is currently relatively measuredHowever, an invigorating perspective emerged from a report released on December 20 by Mislav Matejka, an analyst at JPMorganThe report suggests that the U.S. stock market still possesses the capacity to produce surprising outcomes, particularly highlighting the potential of the so-called "Mag 7" companies—Apple, Microsoft, Amazon, NVIDIA, alongside a few others—to serve as stalwart pillars of profit growth in the larger U.S. market.

JPMorgan forecasts that the Mag 7 companies are poised to achieve a remarkable 22% growth in earnings for the fourth quarterAlthough this rate of increase represents a slowdown when compared to previous quarters, it is truly noteworthy that the Mag 7 has consistently outperformed market expectations for seven consecutive quartersThis stellar performance can largely be attributed to the ongoing dedication and innovative breakthroughs by these tech giants within their respective fieldsTake Apple, for exampleIts continual enhancements to the iPhone lineup and its expansion into wearables and software services have significantly solidified its market presence, providing a robust foundation for profit growthMicrosoft, on its part, has made substantial inroads into cloud computing and artificial intelligence, with its Azure cloud services showing robust performance and its collaboration with OpenAI positioning it favorably amidst stiff competition within the tech industry.

Despite the gradually shrinking gap in earnings growth rates between the Mag 7 and other companies within the S&P 500 index, it becomes clear that the Mag 7's superiority remains striking when assessed in absolute terms

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Recent professional reports have precisely indicated that if we exclude the impact of the Mag 7, the expected earnings growth for the S&P 500 index would merely hit around 5%. This particular data point serves as a precise gauge, distinctly illustrating the irreplaceable core driving role that the Mag 7 prides itself on in the lengthy procession of profit growth within the U.S. stock marketWith their formidable earning potential, these companies not only reign supreme within their industry but also continuously invigorate related upstream and downstream enterprises via their comprehensive influence across the industry chain, thereby playing a crucial supportive role for the stability and prosperity of the overall U.S. stock market as indispensable forces.

From a macro perspective, the earnings expectations for the S&P 500 index have undergone significant downward adjustments over recent months, dropping its year-on-year growth projections to just 8%. This stands in stark contrast to the anticipated figure of 18% projected at the beginning of the previous yearNevertheless, JPMorgan’s report suggests that this conservative outlook may actually yield unexpectedly positive repercussions for the marketOn one hand, even though the general earnings growth expectation remains subdued, a demonstration of accelerated economic activities recent in the U.S., combined with the typically seasonally positive factors inherent in the fourth quarter, could act as key drivers for corporate earnings to surpass current market expectationsFor instance, the arrival of the year-end shopping season typically provides a significant boost to retail sales, thereby heightening profitabilityMoreover, the U.S. economy is anticipated to achieve an actual GDP growth of 2 to 3% in 2025, a rate substantially higher than Europe’s projected 1%. Such resilience in economic activities would undoubtedly function as a consistent source of momentum for U.S. profit growth.

Shifting focus to the European market, stark contrasts with the U.S. stock market become evident, particularly in terms of profits outlook, which looks rather bleak

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JPMorgan forecasts a 1% year-on-year decline in earnings for the Europe Stoxx 600 index for the fourth quarterWhile cyclical sectors may achieve a projected 5% growth buoyed by the economic recovery, the weakness seen in energy, financial, and discretionary consumer sectors presents a considerable burden likely to weigh on overall earnings performanceIn the energy sector, the fluctuations in global energy prices, along with Europe’s pressing transition to renewable energy, pose immense challenges for traditional energy firmsThe financial industry faces constraints from rate volatility and credit risks, which have affected profitability to a degreeThe discretionary consumer sector has observed a noticeable slowdown in growth owing to insufficient consumer confidence and heightened competition amongst market players.

In summary, as we stand at the threshold of the 2024 fourth quarter earnings season, it appears that the U.S. stock market, under the stewardship of the Mag 7, may spring surprises for investors, whilst the European market must contend with myriad challenges steered towards a rugged pathway for profit growthInvestors are advised to closely monitor evolving market dynamics and make prudent investment decisions in response to the complex and ever-changing environment present in today’s capital markets.