U.S. stocks have seen a robust start to the second-quarter earnings season, but the strong results have failed to propel the market to new record levels. JPMorgan Chase warns that the "earnings fuel" driving the market higher is gradually depleting, with multiple leading indicators suggesting the upside for profit revisions is narrowing.
Wall Street giants and tech leaders like Goldman Sachs, Bank of America, Google, and Tesla have reported results, while companies such as BNY Mellon, Johnson & Johnson, and software firm ServiceNow have raised their full-year guidance, indicating overall strength. However, the S&P 500 has largely remained flat this month, still sitting more than 1% below its all-time high as of Wednesday's close.
JPMorgan Chase's strategy team, led by Khuram Chaudhry, noted in a report released Thursday that the war in Iran has altered inflation dynamics, impacting short- and long-term interest rate expectations and complicating the market environment. Against this backdrop, even earnings beats and guidance raises are becoming less effective as catalysts for further stock price appreciation.
Weakening Profit Revision Momentum
The JPMorgan Chase team wrote, "While earnings upgrades are widespread, revision trends suggest the fuel may be about to run out." The team focused on the spread between producer price inflation and consumer price inflation. According to their data, the correlation between corporate sales and this spread is about 47%, and the correlation with earnings per share is about 29%. Currently, this spread appears to have peaked and stalled.
"If this trend persists, the risk is that there may be very limited room for further upside in EPS and sales forecasts," the strategists stated.
Declining ISM Order-to-Inventory Ratio Signals Weaker Demand
Beyond the inflation spread, JPMorgan Chase highlighted another concerning indicator: the U.S. Institute for Supply Management's order-to-inventory ratio has declined over the past three months, further supporting the view of weakening earnings momentum. This ratio is typically seen as a leading indicator for manufacturing demand; a sustained decline suggests order growth is slowing relative to inventory accumulation, posing potential pressure on future revenue and profit expectations.
Fading Outperformance for High-Dispersion and Risky Assets
JPMorgan Chase also pointed to risks from a market structure perspective. The strategists noted that stocks with high dispersion in analyst forecasts—where the gap between the highest and lowest EPS estimates is wide—have recently seen a turning point in their performance.
"For now, high-dispersion stocks appear to have peaked and are starting to give back some of the gains accumulated over the past few years," the strategists wrote. They added that high-risk stocks face similar logical pressure compared to stocks with more stable earnings and lower leverage.
This assessment implies that the excess return potential for stocks that previously benefited from high expectation elasticity in an uncertain environment is narrowing, and market style may be shifting towards more defensive, lower-volatility assets.
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