Earnings season is the next big test for the market and value stocks

Over the coming week, the market will focus on fourth quarter earnings, which should reveal stronger earnings growth for economically sensitive stocks compared to tech players.

The earnings period could test a theory that value and cyclicals should outperform tech stocks. It will also be a time when investors will get a first-hand look at how companies are managing inflation, which rose 7% on an annualized basis in the last month of 2021, as measured by the index. consumer prices.

“Earnings are expected to hit 20% year-over-year growth. Companies are likely to beat that … and hit 25% to 30%,” said Jonathan Golub, chief US equity strategist at Credit Suisse.

“It’s totally skewed with around 20% of the market, cyclicals, energy, materials, industrials, discretionary sectors together expected to grow 95% to 100%,” he added. “Everyone is supposed to do better than technology.”

According to Golub estimates, the S&P technology sector should increase its profits by only 11%.

“Energy, materials, industrials, these old economy companies should be generating much better earnings growth and not just now,” but over the next few quarters, he said.

The materials sector should see its profits increase by 62% and industrials by 52%. Energy earnings are expected to be up sharply since posting negative numbers last year. Consumer discretionary, minus internet retail, is expected to post earnings growth of 33.9%, while financials, which are also considered cyclical stocks, are expected to see earnings rise by just 2%.

“When you have inflation at these levels, there are companies that naturally gain and others that don’t. Those are the companies that are the biggest beneficiaries of inflation. It’s an inflation story,” he said. Golub said. “When you look at where the excitement is in the market, you shouldn’t be looking at tech companies. They’re not bad with 10% growth this year. That’s good, but others are doing well much better.”

Earnings forecast revisions also favored cyclical sectors, Golub said. Earnings growth estimates for cyclicals are up 9.5% since September, but earnings estimates for the tech sector are down 1.6%.

Several major banks reported on Friday, and earnings season is getting busier in the week ahead with a range of sectors. Financiers, like Goldman Sachs, Travelers and Bank of America, are reporting, as are Netflix and consumer brand giant Procter & Gamble. There are also results from transportation companies including JB Hunt Transport Services, United Airlines and Union Pacific.

While Citigroup, Wells Fargo and JPMorgan beat estimates when they reported on Friday, their stock performance was mixed. JPMorgan fell more than 6% on Friday on its disappointing outlook, which included a warning about wage inflation headwinds.

“I think we’re going to get real clarity from a lot of industrial and cyclical type companies, and if they’re able to weather the price pressures and the supply chain issues, and I think the ones that are well managed will be fine,” said Steve Sosnick. , chief strategist at Interactive Brokers.

Bond-linked shares

Sosnick said he expects the tech to remain tied to any sharp moves in the 10-year Treasury, which was around 1.79% Friday night, just below its recent high of 1.8%.

The 10-year yield, which rises when bonds sell, rose sharply early in the year as the Federal Reserve reiterated its hawkish stance. The central bank revealed that it discussed shrinking its balance sheet at its December meeting. This could potentially add further policy tightening from a Fed that is already signaling the possibility of three interest rate hikes this year.

Technology performed better than Industrials and Materials, which each fell around 0.6% for the week. Technology was flat for the week, but outperformed financials, which slipped 0.8%. Energy jumped 5.2% and was one of two positive sectors.

The Nasdaq was down about 0.3% for the week on Friday afternoon, while the S&P 500 was also down 0.3%. The Dow was down 0.9%.

The Treasury market could be a little quieter in the week ahead, with markets closed on Monday for Martin Luther King Jr. Day.

Wells Fargo’s Michael Schumacher said Fed officials have now entered the quiet period ahead of their Jan. 25-26 meeting.

“The 10 years and 30 years [Treasury] auctions are away. It seems to us that the big catalysts happened in the short term. We think it will be quiet next week,” Schumacher said. “I guess the 10-year-olds are sitting. It’s at least a respite for equities.”

There are a few economic reports on the calendar, including the Fed’s Empire State manufacturing survey on Tuesday and the Philadelphia Fed manufacturing survey on Thursday. Existing home sales are also reported on Thursday.

Sosnick expects the volatility to continue and the technology to remain under fire. “I think what we’re seeing is that growth at any cost comes down to growth at a reasonable price,” he said.

Calendar for the coming week

Monday

Markets closed for Martin Luther King Jr. Day

Tuesday

Earnings: Goldman Sachs, Charles Schwab, Bank of New York Mellon, Truist Financial, JB Hunt Transport, Interactive Brokers

8:30 a.m. Empire State making

10:00 a.m. NAHB survey

4:00 p.m. ICT data

Wednesday

Earnings: Bank of America, Procter & Gamble, UnitedHealth, US Bancorp, Morgan Stanley, Alcoa, United Airlines, Discover Financial, FNB, Fastenal, Citizens Financial, Prologis, State Street, Comerica

8:30 a.m. Start of housing

8:30 a.m. Survey of business leaders

Thusday

Earnings: Netflix, Travelers, Union Pacific, American Airlines, Baker Hughes, Fifth Third, Intuitive Surgical, Northern Trust, CSX, Regions Financial, PPG Industries

8:30 a.m. First unemployment registrations

8:30 a.m. Philadelphia Fed Manufacturing

10:00 a.m. Existing home sales

Friday

Earnings: Schlumberger, Ally Financial, Huntington Bancshares