Last week was a difficult week for markets as investors digested better-than-expected March inflation data and an expected rate cut was further delayed. However, the results could help lift the stock out of its funk.
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The stock fell 1.6% for the week, marking the second consecutive week of decline. It was the index’s biggest two-week decline since the market slump in late October.
But while the strong economic backdrop may have pushed up inflation, it also likely contributed to companies’ strong first-quarter results. If the stock market beats high expectations, that’s good news.
Earnings season began in earnest last week, and markets are already assuming a Goldilocks scenario of low inflation and steady economic growth, and the onus is on companies to make that happen, said Scott Kronert, U.S. equity strategist at Citigroup. he points out.
“Although it is very early, the first set of first-quarter reports from each bank shows that guidance is implicit, even though the overall fundamental situation remains healthy,” he said in a note to clients this week. “This highlights the risk that growth will fall short of our high growth expectations.”
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On Friday, financial stocks such as JPMorgan Chase & Co. and Wells Fargo & Co. fell after reporting quarterly results, as investors worried about the impact of interest rates.
Nevertheless, Kronert argues that investors shouldn’t be too pessimistic. “If we see that the market’s implicit growth expectations are justified and there is a continued positive surprise, there could be a buying opportunity as the reporting period progresses,” he said.
In fact, Citi remains optimistic about the market, even though the S&P 500 index is already above this year’s target of 5,100. Citi’s bullish factor for the index is 5700. Kronert said the numbers are gaining attention after the market’s first-quarter rally.
UBS also expects full-year earnings for the S&P 500 to reach $245 per share ($260 in 2025). David Lefkowitz, the firm’s head of U.S. equities, expects earnings per share to grow 7% to 9% year over year in the first quarter, similar to the fourth quarter.
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His confidence stems from the fact that companies that have already reported results for the quarter ending in February are doing relatively well, as well as the economic backdrop shown by labor market and manufacturing data.
Therefore, this rising tide should boost even more companies. “The breadth of growth is starting to widen, with non-Magnificent 7 stocks poised for modest positive growth for the first time since Q4 2022. This trend will accelerate over the remainder of the year. ” Lefkowitz wrote in an article Friday. Note.
This is in sharp contrast to the fourth quarter reporting season. Prior to these reports, analysts had forecast earnings for the Magnificent Seven excluding Tesla.
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The remaining 494 stocks in the S&P 500 will see their earnings increase by about 54%, while their revenues will decline by more than 10%.
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Lefkowitz acknowledges that the first quarter’s rally could provide a breather for stocks, but he believes the brief hiatus is temporary. “The environment continues to be supported by solid earnings growth, likely Fed rate cuts, and a surge in AI investment,” he wrote. “In our base case, we expect the S&P 500 index to end the year at around 5,200.”
However, like Kronert, he points out that his basic argument may be too conservative. He wrote that if inflation improves or earnings go off track, UBS’s “upside scenario of 5,500 seems reasonable.”
So while the second quarter has been more eventful so far than the first, there is still a chance for the bulls to take back the reins.
Email Teresa Rivas at teresa.rivas@barrons.com.
