US stock Q4 earnings season kicks off: HSBC and Citigroup both optimistic about "beat expectations", IT sector remains growth engine.

The US stock market is about to enter the latest earnings season, with large Wall Street banks kicking off the season this week. HSBC and Citi released research reports comparing the fourth quarter earnings of the S&P 500 index. HSBC pointed out that the market generally expects earnings growth to slow down, but the fourth quarter earnings are expected to bring surprises, with profit margins expected to increase slightly with the slowest growth since the second quarter of 2023. It is widely expected that only the technology sector will achieve double-digit earnings growth; consumer goods and utilities sectors are expected to perform the weakest. Meanwhile, Citi expects the fourth quarter earnings per share of the S&P 500 index in 2025 to exceed expectations by about 4%, reaching $275 for the full year. Investors will focus on forward-looking comments, especially on the earnings per share trends for 2026 and beyond. Citi forecasts earnings per share of $320 for the S&P 500 index in 2026, higher than the consensus expectation of $312. Citi believes that the sectors with the most potential for upward earnings revisions are communication services, energy, and financial sectors. Overall, Citi remains optimistic about the key to the S&P 500 index lying in expectations being raised, as strong fundamental trends have already been factored in by the market. Productivity and the long-term development of the technology industry remain key themes. HSBC: Q4 earnings growth to slow down but exceed expectations, IT sector leads the way After several quarters of double-digit profit growth, the earnings per share growth of the S&P 500 index is expected to slow down. Market consensus expects that after four consecutive quarters of double-digit growth, earnings growth will slow to 8% in the fourth quarter. However, similar forecasts have been made in the past few quarters, but earnings have exceeded expectations, with profit margins continuously increasing (most recently by over 6 percentage points). HSBC predicts that, with corporate performance guidance and market sentiment indicators on the rise, there will still be earnings surprises in the fourth quarter. However, the comparison base for the fourth quarter will be more challenging - it will have to deal with the strong 18% earnings per share growth during the fourth quarter of the previous year during the election period. The threshold for earnings surprises this earnings season will be higher, especially for the "Mag 7" in technology, finance, and healthcare sectors. Key points to watch this earnings season include: artificial intelligence capital expenditure and growth momentum, earnings guidance/outlook for 2026, and profit margin guidance (tariff pressure or artificial intelligence efficiency improvement). The IT industry is expected to lead the growth. Among the various industry sectors, only the technology sector is expected to achieve double-digit earnings growth (year-on-year growth of about 26%), while the general expectation for the financial, industrial, and utility sectors implies the largest deceleration in growth. The slowdown in the industrial sector may be mainly due to the significant decline in the transportation sector, while the weakness in the utility sector may be concentrated in some large companies. The financial sector is facing a more challenging comparison base, but the fundamentals are still optimistic. Overall, it is widely expected that profit margins will remain stable, with a slight increase of about 10 basis points year-on-year, mainly driven by the information technology sector. HSBC also pointed out that the market concentration is high. One of the biggest risks identified by investors is the increasing market concentration. Although the profit growth of Mag 7 is expected to slow down, it will still exceed the other constituent stocks of the S&P 500 index. Given their size, the seven giants currently account for 26% of the profitability of the S&P 500 index, along with technology stocks, accounting for about 40% of total profits. With the seven giants and technology stocks continuing to outperform the broader market, this concentration seems likely to increase further. It is expected that by 2025-2026, super-sized data center operators will account for 30-34% of total capital expenditures. Similar to previous quarters, HSBC has selected companies in the S&P 500 index with upward-revised profit expectations, low valuations, and declining stock prices (see the table below). The bank also highlights industries that have performed well despite downward revised profit expectations (non-essential consumer goods, utilities, communication services), and industries that have not been rewarded despite upward revised profit expectations (financial). Citi: Q4 continues the tradition of "exceeding expectations" in earnings, key focus on 2026 guidance 2025 fourth quarter earnings outlook: Citi expects a "normal" surprise in the fourth quarter of 2025 earnings season; the performance of the S&P 500 index constituent companies is expected to exceed market expectations by about 4%, driving earnings per share to $275 for 2025. Given the current valuation environment, the key focus for investors will be forward-looking comments, especially on the trend of earnings per share in 2026. The upward revision of earnings expectations for 2026 is crucial to maintaining a bullish view of the US stock market, driven by macro factors such as labor productivity, industrial production, housing starts, and stable inflation. Earnings outlook for 2026: Continued upward revision - Citi forecasts that earnings per share for the constituent companies of the S&P 500 index in 2026 will rise to $320, higher than the current consensus expectation of $312. Growth sectors in the market, especially large artificial intelligence companies, will continue to drive earnings expectations. Cyclical industries emerging from earnings recession may alleviate the prevalent trend of downward revisions, partially offsetting the negative impact of growth. The communication and financial sectors have the greatest potential for upward revision, while consumer staples, industrial, and material sectors may face challenges. Expectations: Strong fundamentals already priced in by the market - The long-term consensus earnings per share (EPS) forecast for the S&P 500 index by 2029 is close to a compound annual growth rate of 13%. Market prices reflect a growth expectation of 12.5%, consistent with the upward revised consensus expectation. The healthy trajectory of earnings growth has already been priced in by the market, indicating that even if earnings slightly exceed expectations, the magnitude of the boost to earnings per share growth may be underestimated, as management's comments on future trends and their impact on forward-looking consensus expectations are more important. Macroeconomic impact: Productivity remains crucial - Citi's regression analysis based on macroeconomic trends highlights the importance of productivity for earnings growth of the S&P 500 index. If non-farm labor productivity remains at a year-on-year rate of 1.9%, the analysis shows that earnings per share for the S&P 500 index in 2026 will be $306. If productivity continues to grow by 0.23% per quarter, in line with trends since 2021, the figure for 2026 will rise to $319. The bottoming out rebound in industrial production and housing starts, coupled with easing cost pressures, will once again support earnings growth of the S&P 500 index far exceeding the pace of US GDP growth.