Wall Street expects a subdued earnings season for American companies despite the stock market's fireworks in the first quarter.
Yes, the S&P 500 index rose 10% from January to March. But strategists expect earnings for S&P 500 companies to grow just 3.9% in the first quarter, the slowest year-over-year growth rate since 2019, according to data compiled by Bloomberg Intelligence. But in this case, the market may be onto something. Because these forecasts are overly pessimistic, as in the fourth quarter, when growth was expected to be around 1%, but the actual result turned out to be more than 8%. This is because there is a very high possibility that this will happen. %.
“Traders are expecting a rate cut by the Federal Reserve later this year, which is likely to be reflected in further strong consumer spending and economic activity, and “This will lead to improved earnings growth and higher stock prices.” I said on the phone.
Earnings season for JPMorgan Chase, Wells Fargo and Citigroup gets into full swing on Friday. Other companies, including BlackRock, the world's largest asset manager, State Street Corporation and Delta Air Lines, are also scheduled to report results this week.
Here are five key themes to look out for.
intensive growth
With a resilient economy and strong consumer demand, S&P 500 companies are expected to report higher earnings growth for the second straight quarter after three consecutive quarters of profit contraction. And the high profits of big tech companies are likely to be the main driver.
The seven leading growth companies in the S&P 500 (Apple Inc., Microsoft Inc., Alphabet Inc., Amazon.com Inc., Nvidia Inc., Meta Platforms Inc., and Tesla Inc.) are expected to see earnings rise 38%. In the first quarter, according to Bloomberg Intelligence. Excluding these, the index's remaining earnings are expected to contract by 2%.
Wall Street expects this trend to reverse as the year progresses. Those seven companies are expected to have 15% earnings growth in the fourth quarter, while the rest of the S&P 500 are expected to grow 15%, according to data compiled by David Kelley, chief global strategist at JPMorgan Asset Management. It will be 18%.
raise expectations
Analysts are raising their earnings estimates for traditionally out-of-favor groups, from health care to utilities, faster than they lower them.
In fact, 7 out of 11 sectors in the S&P 500 are expected to see faster earnings growth over the next year. Ranked by 25th percentile earnings revision, utilities, financials, and healthcare are the leading sectors, with energy, materials, and communications services at the bottom, according to BI data.
horde of cash
Corporate cash and free cash flow are at record levels, setting the stage for a recovery in how America's largest companies use capital, including paying dividends to shareholders and investing in expansion.
According to BI data, shareholder dividends among S&P 500 companies rebounded in the fourth quarter, and share buybacks returned after four consecutive quarters of decline. BI's Song said the increase in capital spending will depend on recovery in areas other than the spending-heavy technology sector.
Improved margins
Traders will likely focus on operating margins, a key measure of profitability that has historically been an indicator of where a company's stock price is heading.
Consumer and producer price increases have slowed sharply over the past year, thanks to higher profits as companies cut costs and an unexpected boom in artificial intelligence. Analysts now expect first-quarter operating margins to be 15%, but the worst pain is in the rearview mirror as the outlook improves in coming quarters, according to data compiled by BI. right.
sector picking
Traders don't expect stocks to move all at once this earnings season. Differences in the inflation outlook for S&P 500 constituents have kept the index's expected one-month correlation between stocks near its lowest since 2018, according to Bloomberg data. A value of 1 means the security moves in lockstep, currently 0.16.
This is because three of the 11 groups – communications services, technology and utilities – are expected to see profit growth of more than 20%, while energy, materials and healthcare companies are likely to see their profits shrink. Contrary to popular belief, moderate inflation has historically had a broad positive impact on earnings because it encourages growth and lending, said Dan Eye, chief investment officer at Fort Pitt Capital Group. It is said that
“Earnings are based on nominal terms, so even if there is some inflation in the system, it's not bad for corporate profits,” Ai said. “Given the massive rally, the stock market clearly sniffed it out in the first quarter.”
— With assistance from Elena Popina
