JPM sees U.S. earnings leading eurozone in Q3 with cyclicals poised to improve

Investing.com -- Third-quarter earnings season is set to once again highlight the gap between U.S. and eurozone profit performance, JPMorgan strategists argue, with consensus pointing to a 6% year-on-year increase in S&P 500 earnings versus a 1% decline for the Stoxx 600.

Analyst expectations have held steady into reporting season, unlike the usual pattern of downgrades, and the strategists note that “activity momentum improved during the quarter,” helped by firmer PMI readings.

The team, led by Mislav Matejka, also highlights that stability in estimates over the past two months raises the potential for positive surprises.

Around 60% of the S&P 500’s market cap will report results over the next two weeks, compared with about 50% in Europe.

Mega-cap technology remains a major driver, with the so-called Magnificent 7 expected to post 15% earnings growth after delivering a 27% surge last quarter, nearly twice as strong as initial forecasts.

The rest of the S&P 500 is projected to grow earnings by around 4%, and JPMorgan flags that non-Mag 7 names delivered their strongest expansion in three years last quarter at 9%. Strategists say a similar pattern of upside surprise could repeat.

In contrast, eurozone companies disappointed with a 1% earnings contraction in the previous quarter, reinforcing the bank’s cautious stance on the region since March.

While eurozone performance is again likely to lag the U.S. this quarter, strategists expect the gap to narrow slightly “by a smaller magnitude” thanks to exporter earnings that have already been heavily rebased, with the potential for an “inflection” to appear.

Median earnings growth tells a more balanced story, with both regions at around 4% year-on-year, suggesting scope for upside surprises if topline trends hold.

Still, one area of concern is revenue momentum, with weaker Brent prices and signs of softer U.S. labour and retail data pointing to possible pressure on sales growth.

Bond yields have retreated more than 60 basis points from their peak, helping defensives such as Utilities and Healthcare outperform over the past one to three months in both the U.S. and Europe.

Strategists argue this confirms their long-duration positioning but add that “cyclicals sector earnings could start to look better” heading into next year as activity indicators improve.

They point to rising PMI readings, better credit impulse in Europe and signs of improving consumer sentiment and liquidity conditions.

Looking into 2026, JPMorgan believes that cyclicals could benefit from stronger macro trends, including a potential pickup in Chinese consumer demand that should support luxury and industrial names.

While eurozone earnings for 2025 are still being revised lower, projections for 2026 point to a near-15% rebound on easier base effects and improving domestic and external demand.

"We are now bullish Eurozone, post the sideways trading and amid a range of pushbacks," the strategists wrote.

"If the latest tariff standoff and credit concerns result in some more equity weakness, we do not think Eurozone needs to be a beta on the way down, given more favourable positioning and valuations, and given an already weak recent relative performance," they added.

The strategists have argued in recent weeks that messy French political newsflow should be used as a buying opportunity and continue to hold that view.