"US Companies' Q2 Profits Down 9%... Market Outlook for Second Half Under Close Watch (Comprehensive)"

Bloomberg Intelligence Outlook
US and Europe Q2 Profit Decline Largest in 3 Years
AI Companies' Earnings, Labor Costs, and Exchange Rates as Variables

Dark outlooks have emerged ahead of the earnings announcements for the second quarter of this year from major companies in the United States and Europe. Analysts suggest that the global stock market rally, which has continued since the beginning of the year, may be reaching a turning point due to weak earnings.

On the 16th (local time), Bloomberg News cited Bloomberg Intelligence (BI), its economic research division, reporting that the earnings of S&P 500-listed companies for the past second quarter are expected to decline by 9%, marking the largest drop since 2020. So far, 5% of S&P 500 companies have reported earnings, with an average profit decrease of 9.3%. During the same period, European companies’ earnings are estimated to shrink by 12%.

The stock market, which had been on an upward trend during the first half of this year, has now turned red. Expectations for stock prices are expected to dim due to poor earnings. Brian Frank, portfolio manager at Frank Value Fund, said, "The fact that stock valuations remain too high is a major risk," adding, "If the earnings of S&P 500 companies slow down significantly, the overall stock market is likely to decline." Bloomberg News reported, "Earnings of U.S. and European companies are expected to decrease at the largest rate since 2020," and "the stock market rally is facing a critical test from corporate earnings." The U.S. S&P 500 has risen 17.3% since the beginning of the year, while the Euro Stoxx 50 has increased by 16.0% during the same period.

There is a forecast that the profitability and changes in labor costs of artificial intelligence (AI) companies, which have been the main drivers of this year’s stock market boost, will affect the stock prices of other companies. In Europe, the impact on export companies to the U.S. due to a weaker dollar and stronger euro is considered a key point to watch. Annika Gupta, Director of Macroeconomic Research at global asset management firm WisdomTree, said, "If the enthusiasm for AI is not sufficiently reflected in the earnings of tech companies, the stock market may experience a temporary correction."

There is also a growing outlook that the easing of inflation in the U.S. could hamper earnings. If labor costs continue to rise while the rate of price increases slows rapidly, companies may find it difficult to pass costs onto product prices, leading to margin declines. Last month, the U.S. Consumer Price Index (CPI) rose 3.0% year-over-year, marking the lowest increase in two years and three months, while the Producer Price Index (PPI) increased by 0.1%, the smallest rise in two years and eleven months.

The strengthening of the euro against the dollar, as the U.S. Federal Reserve (Fed) nears the end of its tightening cycle, is also a factor weighing on earnings. British investment bank Barclays predicted that the decline in earnings for European companies will be larger than that of U.S. companies due to weakness in the manufacturing sector. Evgenia Molotova, Senior Investment Manager at Pictet Asset Management, said, "I am skeptical whether companies can show the same level of earnings resilience this quarter," adding, "To confirm whether earnings will rebound in the second half of this year, growth and margin stability will be key."

On the other hand, some expect the strong market trend to continue in the second half of this year. In particular, the slowdown in U.S. corporate earnings is believed to have bottomed out in the second quarter and will improve significantly in the second half, becoming a factor that will influence the stock market more than the Fed’s tightening variables. The outlook for a soft landing of the U.S. economy is also gaining traction again. According to a recent survey by The Wall Street Journal (WSJ) of economists, the probability of a recession in the next 12 months is 54%, down from 61% in the previous two surveys. Dan I, Chief Investment Officer (CIO) at Fort Capital Group, said, "If a deep recession does not occur, the worst earnings pain appears to be over," adding, "The stock market has recently started looking for brighter times to generate returns."

This content was produced with the assistance of AI translation services.