JPMorgan says Q4 earnings season likely to reassure despite geopolitical noise

JPMorgan strategists expect a broadly constructive Q4 earnings season, arguing resilient activity momentum should produce stronger results than consensus. Headline year‑on‑year EPS growth is about +9% for the S&P 500 versus roughly -2% for Europe, but equal‑weighted median forecasts narrow that gap to ~+5% (US) and ~+2% (Europe), supporting a bullish view on Eurozone earnings and a widening of drivers beyond US/AI into cyclicals such as capital goods, semiconductors and basic resources, while bank earnings remain supportive but may soften into 2026.

Analysis

Market structure: JPMorgan’s view implies winners will be European cyclicals (capital goods, autos), semiconductors and basic resources where cyclical demand and capex re-acceleration should lift margins; expect 6–12 month EPS upgrades of ~5–15% for mid-cap cyclicals if PMIs stay >50. Losers are the narrow AI/mega-cap cohort if investors rotate—these may underperform by 5–15% in months as equal-weighted growth broadens and market cap leadership narrows. Cross-asset: stronger cyclical beats should lift commodity prices (copper, iron ore +5–12% over 3–6 months) and put mild upward pressure on 10y yields (~10–30bp) and EUR vs USD (target EUR/USD +2–4% on better Euro EPS prints).

Risk assessment: Tail risks include a sharp geopolitical escalation or new tariff episode that wipes out 1–3% of GDP expectations in 6–12 months, and an AI-policy regulatory shock that rerates growth multiples by 10–20%. Time horizons: immediate (days) volatility spikes tied to headlines; short-term (weeks/months) earnings surprises drive sector rotation; long-term (quarters) depends on capex realization and China demand recovery. Hidden dependencies: cyclical beat depends on input-cost stability (energy, freight) and bank credit availability; catalysts include Q4 earnings surprises, Eurozone PMI prints, and China industrial data over next 6–12 weeks.

Trade implications: Direct plays favor SMH (semiconductors), FEZ/EZU (Euro cyclical exposure), and miners BHP/RIO for basic resources; target 2–4% portfolio allocations with 3–6 month horizons. Pair trades: long FEZ (or EZU) vs short SPY concentrated exposure to capture equal-weight re-rating; options: buy 3–6 month call spreads on SMH or BHP to cap cost and amplify convexity around earnings and PMI releases. Rebalance size based on earnings beats (> +5% EPS surprise) or misses (cut after -5% surprise).

Contrarian angles: Consensus underestimates equal-weight effect — median equal-weight EPS suggests Europe could outperform by 3–7% vs cap-weighted expectations over 6 months, a mispricing opportunity. Risk: a cyclical bounce without margin expansion (input-cost rebound or weaker final demand) would revert gains and punish low-quality cyclicals. Historical parallel: 2016–17 cyclical recoveries showed fast re-rating then rapid drawdowns when China demand disappointed; manage positions with strict stop-losses and volatility-aware entries to avoid ETF-arbitrage squeezes.

Key Decisions for Investors

• Establish a 2–3% portfolio long position in SMH (VanEck Semiconductor ETF) and add 1% selectively in AMAT/LRCX; target 10–20% upside in 3–6 months driven by capex recovery, exit or trim if SMH underperforms by 8% from entry or if global semiconductor PMI falls below 48.
• Rotate 2–3% of equity exposure into Europe cyclicals via FEZ or EZU (FEZ preferred for STOXX50 exposure) and fund by reducing US mega-cap growth by 2–3%; implement as a 3–6 month trade, close on FEZ outperformance vs SPY of +5–8% or after Q2 2026 EPS season if divergence persists.
• Use options to express leveraged views: buy a 3-month 15% OTM call spread on SMH sized at 0.5% portfolio risk (cap cost), and buy a 3–6 month 10–15% OTM call on BHP or RIO sized at 0.5% portfolio risk to play basic-resources upside; roll or cut if implied volatility collapses >30% or underlying falls >12%.
• Hedge downside: allocate 1–2% portfolio to 1-month ATM SPY puts or a VIX-call structure if geopolitical risk index rises >50bps or headlines escalate; reduce hedge if VIX falls below 12 and no new tariff/news shock within 30 days.