The US stock market is about to welcome the latest earnings season, commencing this week with major Wall Street banks reporting their results first. HSBC and Citi have released research reports providing forward-looking analysis on the S&P 500 index's fourth-quarter earnings. HSBC points out that while market consensus expects a slowdown in earnings per share (EPS) growth, Q4 earnings reports are likely to deliver positive surprises as seen recently. Profit margins are anticipated to rise slightly, with the growth rate being the lowest since Q2 2023—only the technology sector is widely expected to achieve double-digit EPS growth; the consumer staples and utilities sectors are projected to be the weakest performers. Meanwhile, Citi expects the S&P 500's Q4 2025 EPS to surpass consensus estimates by approximately 4%, with full-year earnings reaching $275. The primary focus for investors will be forward-looking commentary, particularly regarding the EPS trajectory for 2026 and beyond. Citi forecasts 2026 S&P 500 EPS at $320, higher than the bottom-up consensus estimate of $312. From a top-down perspective, supported by improved labor productivity, growth in industrial production, better housing starts, and stabilizing price-cost inflation dynamics, earnings expectations for 2026 should be subject to sustained upward revisions. Citi believes the communication services, energy, and financial sectors have the greatest potential for positive earnings estimate revisions. Overall, the key to Citi's continued optimism for the S&P 500 lies in these upward estimate revisions, as strong fundamental trends are already priced in by the market. Long-term developments in productivity and the technology industry remain critical themes. Following several consecutive quarters of double-digit earnings growth, the S&P 500's EPS growth is set to decelerate. Market consensus expects Q4 earnings growth to slow to 8% after four straight quarters of double-digit expansion. However, similar forecasts in recent quarters were ultimately exceeded by actual earnings, accompanied by rising profit margins (the most recent beat was by 6 percentage points). HSBC anticipates further earnings surprises in Q4, driven by improving corporate guidance and market sentiment indicators. Nevertheless, the comparison base for Q4 will be more challenging—needing to contend with the strong 18% EPS growth recorded in Q4 of last year during the election period. The bar for positive earnings surprises is higher this earnings season, particularly for the "Magnificent Seven" (Mag 7) tech stocks, and the financial and healthcare sectors. Key points to watch this season include: AI-related capital expenditure and growth momentum, 2026 performance guidance/outlook, and margin guidance (considering tariff pressures or AI efficiency gains). The IT sector is poised to lead growth. Among all sectors, only the technology sector is expected to deliver double-digit EPS growth (approximately 26% year-over-year), whereas consensus estimates for the financials, industrials, and utilities sectors imply the most significant slowdowns. The deceleration in industrials may be primarily due to a substantial decline in the transportation sub-sector, while weakness in utilities is likely concentrated in a few large companies. The financial sector faces tougher year-over-year comparisons, but its underlying fundamentals remain positive. Overall, consensus expects profit margins to remain stable, showing a slight year-over-year increase of about 10 basis points, primarily driven by the information technology sector. HSBC also highlights high market concentration. One of the biggest risks cited by investors is the rising market concentration. Although the Mag 7's earnings growth is expected to slow, it will still outpace the rest of the S&P 500 constituents. Given their size, the Magnificent Seven currently account for 26% of S&P 500 earnings; combined with other tech stocks, they represent about 40% of total index earnings. This concentration appears set to increase further as the Mag 7 and tech stocks continue to outperform the broader market. Hyperscale data center operators are projected to account for 30-34% of total capital expenditures by 2025-2026. As in previous quarters, HSBC screened for S&P 500 companies that have seen earnings estimate upgrades but trade at low valuations and have experienced stock price declines (see table below). The bank also highlighted sectors that outperformed despite earnings estimate downgrades (consumer discretionary, utilities, communication services), and sectors that were not rewarded by the market despite estimate upgrades (financials). Citi expects the Q4 2025 earnings season to continue the tradition of "normal" outperformance; S&P 500 constituent companies are projected to beat market expectations by about 4%, pushing 2025 EPS to $275. Given the current valuation environment, investor focus will be on forward-looking commentary, especially regarding the 2026 EPS trajectory. Driven by macro factors such as labor productivity, industrial production, housing starts, and stable inflation dynamics, upward revisions to 2026 EPS estimates are crucial for maintaining a bullish stance on US equities. Citi expects 2026 S&P 500 EPS to rise to its forecast of $320, above the current bottom-up consensus of $312. Market growth sectors, particularly large AI companies, will continue to drive earnings expectations. Cyclical sectors recovering from an earnings recession might alleviate the previously prevalent trend of estimate downgrades, thereby partially offsetting negative impacts from growth. The communication services and financial sectors have the greatest potential for estimate upgrades, while consumer staples, industrials, and materials may face challenges. Strong fundamentals are already priced in by the market—the long-term consensus EPS expectation for the S&P 500 through 2029 implies a Compound Annual Growth Rate (CAGR) close to 13%. Market prices reflect a growth expectation of 12.5%, aligning with the bottom-up consensus. This healthy earnings growth trajectory being priced in suggests that even modest earnings beats might have a greater impact on elevating the starting point for EPS growth than currently appreciated, as management commentary on future trends and its influence on forward-looking consensus estimates becomes more important. Citi's macroeconomic regression analysis underscores the importance of productivity for S&P 500 earnings growth. If non-farm labor productivity remains at 1.9% year-over-year, the analysis indicates 2026 S&P 500 EPS would be $306. If productivity grows quarterly by 0.23%, consistent with the trend since 2021, the 2026 figure would rise to $319. A bottoming out in industrial production and housing starts, coupled with easing cost pressures, will again support S&P 500 earnings growth significantly outpacing US GDP growth.
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