Since the beginning of the year, stock prices have soared across various sectors. The first quarter earnings season will test the range of the bull market.
“You can always talk about price action and whether the rally is increasing or not, but at the end of the day, it’s the earnings and the fundamentals that matter,” Binky Chadha, chief equity strategist at Deutsche Bank, told Yahoo Finance. he said.
First-quarter earnings reporting begins in earnest on Friday, with JPMorgan (JPM) and other banks expected to report results before the opening bell.revenue from Wednesday’s appetizers will be provided by Delta Air Lines (DAL).
Broadly speaking, the consensus is for profits to increase year-over-year for the third consecutive quarter. Consensus estimates are for first-quarter earnings for S&P 500 (^GSPC) companies to rise 3.2% year-over-year, according to FactSet data.
Market bulls expect earnings and forward guidance for the rest of the year to indicate an improving outlook for companies despite the continued high interest rate environment. Oson Kwon, U.S. and Canadian equity strategist at Bank of America, told Yahoo Finance Live that recent data on economic growth has surprised consensus upside expectations, which is likely “especially true for this fiscal year. This suggests that the consensus may be too low.
“We are aiming for another strong quarter.” [of earnings growth]” Kwon said.
Still, the companies driving earnings growth across the S&P 500 are not expected to change much this quarter.
Research by Goldman Sachs’ equity strategy team, led by David Kostin, shows that the top 10 stocks in the S&P 500 (primarily the Magnificent Seven) are expected to have 32% earnings growth in the first quarter. ing. Meanwhile, the other 490 stocks are expected to decline by 4%.
Nvidia (NVDA) is the clear leader of the group, with revenue expected to grow 406% year-over-year, followed by Amazon (AMZN) at a projected 175%. Meta (META), Eli Lilly (LLY), Alphabet (GOOGL), Berkshire Hathaway (BRK-A, BRK-B), Microsoft (MSFT), Broadcom (AVGO), JPMorgan Chase (JPM), and Apple (AAPL) ) Outside the top 10 for the remainder of the round.
This means that the overall earnings picture of the benchmark index will once again be influenced by the index’s largest companies.
Kostin said if these companies continue to perform well, it’s “relatively unlikely” there will be a “rapid catchdown” in which stocks buy back slower-than-expected earnings growth.
Rather, bullish investors are looking for a market “catch-up” scenario in which the profits of the other 490 companies in the S&P 500 index begin to recover by the end of the year. While this trend is not a clear driver of earnings growth this quarter, Deutsche Bank’s Chadha said it confirms recent market views that U.S. economic growth will be a tailwind for economic growth, and that earnings growth will be I believe there are signs of improvement behind the scenes. Stocks outside the tech sector.
“With the cyclical economic upturn and the return of CEO confidence that we’ve been seeing and talking about, earnings should be even better,” Chadha said. “We should start to see better and more confident guidance.”
To be clear, Chadha still sees mega-cap growth and “good returns” in tech going forward. But he believes company guidance released this quarter will signal a easing of the astronomical profit growth seen at some large companies in 2023.
If this is met by positive guidance from other areas of the market, sectors such as Energy (XLE), Materials (XLB) and Industrials (XLI) will outpace and the rotation seen in the market over the past month will continue to It will be promoted. Improved technology (XLK) and communication services (XLC).
Jeffrey Kleintop, global chief investment strategist at Charles Schwab, told Yahoo Finance Live that if the first quarter results show any indication that a rotation may be underway, that would be welcome for the health of the stock market’s rally. He said this would be a sign that he should do so.
He said the recent rebound in manufacturing activity in the U.S., which grew at the fastest pace since 2022, shows that analysts’ expectations for improved earnings in the economically sensitive sector are more than “hopeful.” he added.
“This is a second wind for the stock market,” Kleintop said.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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