Five themes to watch as earnings season begins

Yes, the S&P 500 rose 10% from January to March. Strategists, however, predict that S&P 500 companies will post their weakest year-over-year profit growth since 2019, just 3.9%, in the first quarter, according to data compiled by Bloomberg Intelligence. But in this case, the market could be right, because these forecasts could very well turn out to be too gloomy, as they were in the fourth quarter, when expectations werearound 1% growthand the actual results were found to be higher than 8%.

While traders expect interest rate cuts from the Federal Reserve later this year, this will likely translate into even stronger consumer spending and economic activity and, in turn, a better profit growth and higher stock prices, said Wendy Soong, senior analyst at BI. the phone.

Earnings season is in full swing on Friday, withJPMorgan Chase & Co.,Wells Fargo & Co.AndCitigroup Inc.report. Other companies, includingBlackRock Inc. the world's largest asset manager andState Street Corp.withDelta Airlines Inc.will show results this week.

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

Concentrated growth

A resilient economy and strong consumer demand are expected to fuel an increase in earnings growth for S&P 500 companies for a second straight quarter after three straight quarters of profit contraction. And the high margins of big tech companies will likely be a key factor.

Earnings of the seven largest growth companies in the S&P 500 Apple Inc.,Microsoft Corp.,Alphabet Inc.,Amazon.com Inc.,Nvidia Corp.,Meta Platforms Inc.AndTesla Inc. are on track to increase 38% in the first quarter, according to Bloomberg Intelligence. Excluding them, the profits of the rest of the indices are expected to decrease by 2%.

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

Raise expectations

Analysts have raised their earnings forecasts faster than they have revised them down for previously unloved groups, from healthcare to utilities.

In fact, seven of the 11 sectors in the S&P 500 are poised to see earnings growth accelerate over the next year. Utilities, financial services and healthcare are the top sectors ranked by earnings revisions at the 25th percentile, with energy, materials and communication services at the bottom, according to BI data.

Cash hordes

Corporate cash and free cash flow are at record levels, paving the way for a recovery in how America's largest companies deploy capital, whether through payouts to shareholders or investments in the development of their activities.

Shareholder payouts rebounded in the fourth quarter for S&P 500 companies, and buybacks resumed after four straight quarters of declines, according to BI data. An increase in capital spending will depend on a rebound outside the big-spending technology sector, BI's Soong said.

Improved margins

Traders will closely monitor operating margins, a key indicator of profitability that historically offers a signal about the direction a company's stock price is heading.

The gap between consumer and producer price growth has narrowed significantly over the past year as business cost cutting led to higher profits, as well as an unexpected boom in artificial intelligence. Analysts now forecast an operating margin of 15% for the first quarter, with the worst in the rearview mirror as forecasts improve for future quarters, according to data compiled by BI.

Sector selection

Traders don't expect stock prices to move in unison this earnings season. The divergent inflation outlook for S&P 500 sectors has left the one-month expected correlation gauge in stock indexes near its lowest since 2018, according to Bloomberg data. A value of 1 means that stocks will move at the same rate, currently at 0.16.

It comes as three of 11 communications, technology and utilities groups are expected to post profit growth of more than 20%, while energy, materials and healthcare companies will likely see their profits decrease. Contrary to popular belief, moderate inflation has historically been good for profits overall because it promotes growth and lending, according to Dan Eye, chief investment officer at Fort Pitt Capital Group.

Profits are expressed in nominal terms, so having a little inflation in the system is not a bad thing for corporate profits, Eye said. The stock market clearly spotted this in the first quarter, given the strong recovery.

With the help of Elena Popina

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