This summer, restaurants and many non-Walmart retailers warned consumers of trouble. Doubts have grown about the artificial intelligence ambitions of big tech companies, whose size has driven much of the stock market’s performance. The Federal Reserve cut interest rates to stimulate the economy after signs of a slowing job market, raising questions about the state of an economy that needed the stimulus in the first place.

As companies such as JPMorgan Chase & Co (JPM.N) and Delta Air Lines Inc (DAL.N) begin reporting third-quarter earnings this week, we will see how much additional stimulus the economy needs before concerns are allayed.

“The main thing driving the market, and what’s driving the most calls and questions for us, is without a doubt the obsession with the Fed and rate cuts,” said Mark Malek, chief investment officer at financial services firm Siebert, noting those trends have defined the quarter.

He added: “At the end of the quarter, fears that the economy could be in a recession took over. The two are closely related.”

Allaying those fears may not be easy. Many of the concerns that defined the last wave of quarterly results remain in place this time around.

Ahead of the earnings release, analysts continued to discuss a "dichotomy" among consumers, with higher-income groups feeling relatively less affected by the price increases of the past two years, while lower-income groups have felt the more significant pain. . In addition, concerns about the intensification of war in the Middle East, the war in Ukraine and the upcoming US elections have also deepened. The impact of China's monetary stimulus program on its sluggish economy is unclear.

Analysts say it may take time for the benefits of lower interest rates to filter through to everyday life. They continue to debate whether the Fed needs to lower borrowing costs further to achieve that goal, and whether investors will seek yield elsewhere after piling into technology companies like Nvidia Corp NVDA.O and Microsoft Corp MSFT.O.

Still, markets were optimistic about the September U.S. jobs report. A longshoreman strike at East Coast ports that threatened the economy has been suspended until Jan. 15 after a tentative agreement with employers.

Growth slowed in third quarter

According to a FactSet report released last Friday, earnings per share growth for S&P 500 companies is expected to be 4.2%. This will be the fifth consecutive quarter of year-over-year earnings per share growth, but it will be a slowdown from the second quarter, the first quarter, and the third quarter of 2023.

The report also noted that Wall Street analysts' third-quarter earnings per share estimates were lowered by more than average, indicating low market expectations. However, low expectations, in turn, make it easier for companies to beat expectations.

Even as inflation eases, people are still feeling the pinch from higher-priced food and some services, as well as cost-cutting in jobs. However, overall profit margins for S&P 500 companies are expected to remain roughly stable. According to FactSet, the S&P 500 net profit margin is expected to be 12.1%.

This profit margin estimate is close to the historical high for 2021. Although it is slightly lower than the previous quarter, it is still higher than the average level of 11.5% in the past five years.

The 12.1% estimate is driven in large part by price increases, layoffs and tighter budgets, with margins likely to decline as more quarterly results come in. But it also reflects a greater priority companies are placing on controlling spending after the past decade’s bull run.

“The discipline that these companies have demonstrated over the last few years, their obsession with cost, is going to continue,” said John Belton, managing director of growth portfolios at Gabelli Funds. “I think technology will continue to be a big enabler of margin expansion.”

The impact of lower interest rates on the real estate industry is more obvious

But some analysts say there won’t be an immediate reduction in mortgage rates, which could still drive up home prices as buyers try to take advantage of lower borrowing costs.

John Workman, managing director of investment strategy at Pathstone, said the bigger changes will come in the fourth quarter and beyond because the Fed didn’t cut rates until late in the third quarter, but he noted the Fed will also try to remain flexible.

“So I think we need to be cautious in looking at these rate cuts,” he said.

Bank and Big Tech earnings are coming

For JPMorgan and other big banks, earnings reports will, as always, offer a broader view of the borrowing and spending that drives the economy. Analysts will be watching the outlook for lending, initial public offerings and trading markets, especially the impact of lower interest rates amid growing caution among corporate clients.

In the coming weeks, we’ll start hearing earnings reports from the so-called “Big Seven” — Meta Platforms (META.O), Alphabet (GOOGL.O), Nvidia (NVDA.O), Apple (AAPL.O), Microsoft (MSFT.O), Amazon (AMZN.O) and Tesla (TSLA.O). These reports will come against the backdrop of these companies’ increased investments in artificial intelligence, raising questions about how much the technology will cost, whether it can live up to expectations and when the payoffs will come.

Asked in July about its spending on artificial intelligence, Google CEO Sundar Pichai said: "The risk for us to underinvest is far greater than the risk of overinvesting" because of the technology's potential to change the way work is done.

However, a report last month from Morgan Stanley (MS.N) sounded a note of caution for AI investors, noting that historically when new technologies emerge, investors have “focused too much on the originating companies” and underestimated the potential for new companies to “leverage other companies’ capital expenditures to generate new products and services.”

“I think the discussion or debate in the market has become more sophisticated,” Belton said. “I would describe the market as becoming a little fatigued on the topic of artificial intelligence.”

He later added: “This two-sided debate… stems from a pessimistic view that there is almost a prisoner’s dilemma in the market, where companies feel forced to invest a lot of money in this technology even though there is no revenue generated yet on the other end.”

As lower interest rates take some pressure off other companies, investors may shift their focus accordingly. But analysts say the Big Seven still have plenty of room to grow.

“We think there’s still a lot of growth potential in these companies, but other companies are going to grow as well,” said Brad Peterson, national investment adviser at Northern Trust. “So investors are going to broaden their exposure.”

The article is forwarded from: Jinshi Data