Earnings season starts strong, so why is the US stock market struggling to hit new highs? JPMorgan: "Profit fuel" is running out.
The US stock market’s second quarter earnings season opened strong, but robust performance failed to push the market past historic highs. JPMorgan warns that the “profit fuel” driving US equities upward is gradually running out, and several leading indicators show the upside for earnings revisions is narrowing.
Wall Street giants and tech leaders such as Goldman Sachs, Bank of America, Google, and Tesla have successively released their earnings reports. Companies like BNY Mellon, Johnson & Johnson, and software company ServiceNow have raised their full-year guidance, with an overall strong earnings season. However, the S&P 500 has essentially stalled this month, remaining more than 1% below its historic peak as of Wednesday’s market close.
The JPMorgan strategist team pointed out in a report released Thursday that the Iran war has altered the inflation trend, thereby affecting both short- and long-term interest rate expectations and making the market environment more complex. Against this backdrop, even earnings beating expectations and revised guidance are increasingly unlikely to act as catalysts for further stock price gains.
Profit Revision Momentum Weakens, Upside Narrowing
The JPMorgan strategist team, led by Khuram Chaudhry, wrote in the report: “While earnings revisions are widespread, the revision trend suggests that the fuel might soon run out.”
The team focuses on the spread between producer price inflation and consumer price inflation.
According to JPMorgan data, corporate sales correlate about 47% with this spread, and earnings per share correlate about 29%. Currently, this spread seems to have peaked and stalled.
“If this trend persists, the risk is that further upward revision space for earnings per share and sales forecasts may be very limited,” the strategists stated.
ISM Orders-to-Inventory Ratio Falling, Demand Signal Weakens
Apart from the inflation spread, JPMorgan points to another cautionary indicator—the orders-to-inventory ratio from the US Institute for Supply Management (ISM) has declined consistently over the past three months, further confirming weakening earnings momentum.
This ratio is commonly viewed as a leading indicator of manufacturing demand outlook. Its continued decline means the growth rate for corporate orders is slowing relative to inventory accumulation, putting potential pressure on future revenue and earnings expectations.
Advantages of Highly Divergent Stocks and High-Risk Assets Fading
JPMorgan also highlights risks from a market structure perspective. The strategists note that stocks with high analyst forecast divergence—i.e., stocks with wide gaps between the highest and lowest earnings per share estimates—have recently reached a turning point.
“Currently, stocks with large divergences appear to have peaked and started to give back part of the gains accumulated over the past few years,” the strategists wrote. They added that high-risk stocks, compared to stocks with more stable performance and lower leverage, face similar logical pressure.
This assessment means that stocks previously benefiting from high flexibility amid uncertainty now have shrinking excess return space, and the market may shift toward defensive, low-volatility assets.
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