As investors brace for the unveiling of corporate earnings in the aftermath of a robust fourth-quarter rally in U.S. stocks, attention turns to what companies have achieved in their earnings scorecards. With expectations suggesting room for an upside surprise, analysts anticipate a modest 1.1% average growth in fourth-quarter profits for S&P 500 Index members compared to the previous year. This marks the smallest positive figure since before the pandemic, despite the equities benchmark’s impressive 11% surge in the last quarter.
The earnings season kicked off with major financial institutions like JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co., and Citigroup Inc. reporting their results. As the season progresses, here are five key themes to watch:
- Leaving Profit Contraction Behind:
- Analysts are keen on definitive signs that the three-quarter streak of contracting S&P 500 profits is behind, particularly with the minimal projected growth. Wall Street eyes guidance to gauge whether companies anticipate sustaining positive momentum amid the economic transition.
- All About Margins:
- Profit margins take center stage as a measure of how efficiently companies convert sales into profit. Net income margins are anticipated to drop to around 11.7%, the lowest since 2020. Challenges in passing input costs to consumers, coupled with wage pressures, contribute to this dip. However, a rebound in profit margins is expected in the next 12 months.
- Not Just AI:
- While artificial intelligence (AI) is predicted to significantly impact global GDP, analysts are interested in its current effect on profits. The seven largest S&P 500 stocks may see a 46% profit growth in the fourth quarter, driven by AI-related sectors. The gap between these tech giants and the rest of the index is expected to narrow later in the year.
- Macro Forces:
- Beyond financial figures, investors will closely monitor executives’ outlook on macro forces such as geopolitics and politics. Despite improving views on company fundamentals, executives’ outlook for external factors is deteriorating. Analysts will focus on CEO sentiment regarding the broader economic environment and its potential impact on capital expenditures.
- Diverging Views:
- The consensus for anemic profit growth masks widely differing outlooks across S&P 500 sectors. Utilities and communication services are poised for profit expansion above 40%, while energy, health care, and materials may experience profit contractions of 20% or more. This divergence contributes to a decrease in expected one-month correlation in S&P 500 stocks, indicating a wider disparity between winners and losers.
As the earnings season unfolds, investors navigate through these themes to make informed decisions and adjust their strategies in response to the diverse landscape across sectors. The outcome of this season is expected to provide valuable insights into the trajectory of the market and specific industries in the coming months.
