Five themes to watch as earnings season begins

Yes, the S&P 500 index rose 10% from January to March. However, strategists expect S&P 500 companies to post their smallest year-over-year profit growth in the first quarter since 2019, just 3.9%, according to data compiled by Bloomberg Intelligence. But in this case the market may be onto something, because those forecasts could be very disappointing – just as they were in the fourth quarter, when expectations were increase of about 1% And the actual results came out to be more than 8%.

“Traders expect an interest rate cut by the Federal Reserve later this year, which is likely to boost consumer spending, economic activity and in turn lead to better earnings growth and higher stock prices,” said Wendy Soong, senior analyst at BI. ” Said on the phone.

Earning season is in full swing from Friday JPMorgan Chase & Co., Wells Fargo & Company And Citigroup Inc. Reporting. Other companies including BlackRock Inc. – the world's largest asset manager – and State Street CorporationTogether Delta Air Lines Inc. Will give results this week.

Here's a look at five key topics to watch:

concentrated development

A resilient economy and strong consumer demand are expected to boost earnings growth for S&P 500 companies for the second consecutive quarter after three consecutive quarters of profit contraction. And strong margins at big tech companies will likely be a key driver.

Profits for the seven largest growth companies in the S&P 500 – Apple Inc., Microsoft Corporation, Alphabet Inc., Amazon.com Inc., nvidia corporation, Meta Platform Inc. And Tesla Inc. – According to Bloomberg Intelligence, there is going to be a growth of 38% in the first quarter. Excluding them, the index's residual profits are estimated to decline by 2%.

Wall Street expects this trend to reverse as the year progresses. In the fourth quarter, those seven firms are expected to post 15% growth in earnings, compared with 18% growth for the rest of the S&P 500, according to data compiled by David Kelly, chief global strategist at JPMorgan Asset Management.

raising expectations

Analysts are raising their earnings forecasts at a faster rate than they are lowering them for previously disliked groups, from health care to utilities.

In fact, seven of the 11 sectors in the S&P 500 are seeing profit growth accelerate next year. Utilities, financials and health care are the leading sectors according to the 25th percentile earnings revision, with energy, materials and communication services at the bottom, BI data shows.

cash rush

Corporate cash and free cash flow are at record highs, setting the stage for improvements in the way the largest U.S. companies deploy their capital, whether through payments to shareholders or expansion of their businesses. Be it through investment.

Shareholder payouts for S&P 500 companies accelerated in the fourth quarter and buybacks resumed after four consecutive quarters of decline, BI data shows. BI's Soong said the increase in capital spending will depend on the rebound outside the heavy-spending technology sector.

margin improvement

Traders will keep a close eye on operating margin, a key gauge of profitability that historically signals which direction a company's share price is headed.

The gap between rising consumer and producer prices has narrowed significantly in the past year due to corporate cost cuts, which have boosted profits, as well as a unprecedented artificial intelligence boom. Analysts now see operating margins for the first quarter at 15%, with the worst of the pain in the rear-view mirror as forecasts improve in the coming quarters, data compiled by BI showed.

sector selection

Traders do not expect a move in share prices this earnings season. The differing inflation outlook for S&P 500 sectors has dropped the expected one-month correlation among the index's stocks to its lowest level since 2018, Bloomberg data show. A reading of 1 means the securities will move in lockstep, it is currently at 0.16.

This comes as three of the 11 groups – communication services, technology and utilities – are expected to see profit expansion of more than 20%, while profits of energy, materials and health care companies are likely to decline. Contrary to popular belief, moderate inflation has historically been good for earnings because it promotes growth, lending and borrowing, according to Dan Eye, chief investment officer at Fort Pitt Capital Group.

“Earnings are nominal, so having a little inflation in the system is not a bad thing for corporate profits,” Eye said. “Given the big rally, the stock market clearly felt it in the first quarter.”

– With assistance from Elena Popina