The US stock market welcomes the earnings season, can the uptrend continue? Five major themes worth paying attention to

According to the VESYNC Financial APP, as US companies begin to report earnings, the upward trend in the US stock market since April is facing a major test.

Driven by the so-called "Big Seven" and AI-related stocks, the S&P 500 index continues to hit new highs. With increasing expectations, especially for mega-cap tech stocks, companies must deliver outstanding performance. Despite the strong profits of large tech companies, growth is expected to slow down.

Data compiled by Bloomberg Intelligence shows that analysts estimate a 9.3% year-on-year increase in profits for S&P 500 index component companies in the second quarter, the largest increase since the last three months of 2021.

The S&P 500 index rose by 3.9% in the previous quarter and has risen by 2.8% so far this quarter.

Outlook for US corporate earnings continues to improve

"High bar," said Ed Clissold, Chief US Strategist at Ned Davis Research. "Even with strong performance, it is not enough to accelerate the growth of the Big Seven."

Investors will be looking for clues on consumer health, especially after disappointing sales performance announced last week by PepsiCo (PEP.US) and Delta Air Lines (DAL.US) stating that even during the peak summer travel season, US domestic airlines are struggling to fill plane seats.

Last Friday marked the beginning of the US stock earnings season, with mixed results from banking giants JPMorgan Chase (JPM.US), Wells Fargo (WFC.US), and Citigroup (C.US). Other companies including the world's largest asset management company BlackRock (BLK.US) and Netflix (NFLX.US) will report earnings this week.

Here are five key themes to watch:

Broader Rebound

Since 2022, investors may for the first time shift their focus to the other 493 companies in the S&P 500 index. Companies outside the tech sector are expected to report their first quarterly profit growth in at least six quarters. According to data compiled by Bloomberg Intelligence, profits are expected to grow by 5.4%, with the potential to accelerate to double-digit growth by the end of this year.

US bank stocks and quantitative strategists Ohsung Kwon and Savita Subramanian stated, "Growth is broadening, and so should the market."

The other 493 component stocks of the S&P index are expected to achieve profit growth for the first time in six quarters

The "Seven Giants," including Microsoft (MSFT.US), Amazon (AMZN.US), Meta (META.US), Apple (AAPL.US), Alphabet (GOOGL.US), NVIDIA (NVDA.US), and Tesla (TSLA.US), are facing a trend of slowing growth. According to data compiled by Bloomberg Intelligence, the profits of these giants are expected to grow by 29%, while the average profit growth rate for 2023 is 35%, with other components of the S&P 500 Index falling by 5%.

Diverging Industry Outlook

Traders believe that stock prices will not fluctuate in sync this earnings season, making it difficult to pick winners. Data compiled by Bloomberg Intelligence shows that despite inflation receding, the outlook for sectors within the S&P 500 Index varies, with a measure of the one-month expected correlation among index components hovering at its lowest level in over 10 years. A reading of 1 implies synchronous security trends, currently at 0.03.

Decrease in Correlation Among S&P 500 Index Components

Meanwhile, profits in three out of 11 sectors (technology, communication services, and healthcare) are expected to exceed 10%, while the profits in real estate, industrial, and materials sectors may shrink. Low correlation is welcomed by fund managers hoping to outperform the index through stock selection.

Vishal Vivek, stock trading strategist at Citigroup, stated that meanwhile, options imply an average up and down movement of 4.3% for S&P 500 Index component companies during earnings season, higher than the historical average of 4.1% since 2012.

Vivek said, "Investors chasing alpha should focus on earnings-related trends," especially as volatility on earnings days relative to non-earnings days has risen to the highest level since 2018.

Chinese Economic Recovery

The market continues to focus on the profit recovery of Chinese companies.

The home appliance and new electric vehicle manufacturing industries are benefiting from China's export boom. However, with Western governments imposing trade barriers, the profit trajectory of these industries faces risks of deviation. So far, the economic impact of such tariffs or restrictions has been limited, but they may eventually erode companies' profits American companies and investors are closely watching the health of the Chinese economy, especially in non-essential consumer goods, technology, industrial, and automotive sectors.

AI Trading

Artificial intelligence will continue to be a focus of attention. As the profit expansion of large-cap stocks slows down, people will pay close attention to how companies in utilities and data centers deploy funds in the field of artificial intelligence, and whether these investments will boost stock valuations.

Goldman Sachs strategists Ryan Hammond and David Kostin stated, "AI trading is receiving increasing attention."

"Investors are increasingly concerned about the potential returns on investment in artificial intelligence spending by mega-cap companies," they referred to Amazon, Meta, Microsoft, and Alphabet. They added that analysts' sales expectations for these companies have not increased with the growth in investment spending.

Goldman Sachs strategists recommend "sales revisions as a key indicator of the sustainability of AI trading."

Election Year Risks

One uncertainty facing the U.S. stock market this year is the U.S. presidential election and the ensuing policy uncertainty.

Companies producing electric vehicles, electric vehicle batteries, semiconductors, solar panels, critical minerals, steel, and aluminum face risks, while industries with strict regulations such as finance and healthcare will be in focus.

Investors will closely watch comments from company management during earnings conference calls and outlook forecasts to look for clues to potential risks to corporate profits