The earnings season that officially kicked off last week has seen a divergence between Wall Street and corporate leadership on profit outlooks, with analysts lowering expectations while corporate guidance suggests continued strong earnings growth.

Data compiled by Bloomberg Intelligence (BI) shows that analysts expect earnings for S&P 500 companies to rise 4.2% year-over-year in the third quarter of this year, down from the 7% year-over-year increase predicted in mid-July. Meanwhile, the companies' own expectations imply a profit growth of about 16%, nearly four times the analysts' forecast.

BI's Chief Equity Strategist, Gina Martin Adams, said the "unusually large" divergence between corporate and Wall Street expectations indicates that "companies should easily exceed (Wall Street) expectations."

Last Friday, several major U.S. banks that started the earnings season set a good tone. Despite the Federal Reserve's 50 basis point rate cut in September, JPMorgan Chase's net interest income (NII) for the third quarter continued to exceed expectations, and the bank also raised its full-year revenue forecast. Although Wells Fargo's NII decreased by 11% year-over-year, below expectations, its revenue and profit significantly exceeded forecasts.

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Wall Street's well-known bear, Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley, wrote in a report released on Monday: "Before the earnings season, several large bank stocks reduced risk in mid-September. This led to a lower threshold of expectations for this quarter. Preliminary results of the earnings season indicate that banks are breaking through this (expectation) threshold."

After two major banks released their earnings last week, Wall Street mentioned that some analysts believe the strong earnings reports from large banks may indicate that the U.S. economy has achieved the so-called "soft landing." Some analysts say that under the premise of a rate-cutting cycle and a soft landing, financial stocks often perform well.

However, bank performance reports may imply that the U.S. economy is experiencing a "no landing." The term "no landing" usually refers to the economy continuing to grow strongly after high growth without the expected slowdown or recession, but inflation levels are not effectively controlled, leaving the Federal Reserve with little room to cut interest rates. Stocks benefit from strong economic performance on one hand, but are also suppressed by the rise in risk-free interest rates, resulting in a generally volatile trend.

JPMorgan Chase's third-quarter performance was excellent, with both revenue and profit exceeding expectations. At the same time, consumer spending remains robust, credit conditions are moderately eased, and the expected easing of inflation and interest rate cuts all provide support for the U.S. economy's "no landing."

As the earnings season continues, investors' attention will eventually turn to the seven tech giants that have mainly driven the rise of U.S. stocks this year - the so-called U.S. stock "Magnificent Seven" (Mag 7), including Apple, Nvidia, Microsoft, Google's parent company Alphabet, Amazon, Facebook's parent company Meta, and Tesla. Since releasing their second-quarter earnings, the "Magnificent Seven" stocks have generally underperformed the broader market, with the S&P 500's gains expanding while they have been consolidating.

The current market consensus expectation is that the "Magnificent Seven" will see an overall year-over-year profit growth of about 18% in the third quarter, slowing down from the 36% growth in the second quarter.Morgan Stanley's Wilson believes: "The fundamental reason for the poor performance of the 'Seven Titans' may simply be a slowdown in earnings per share (EPS) growth compared to last year's very strong increase. If earnings revisions show that the 'Seven Titans' are relatively strong, these stocks may once again perform well, and the gap between the broader market (compared to them) may narrow — just as it did in the second quarter of this year and throughout 2023."