Credit: Shutterstock photoInvestors looking for an answer to the recent market volatility may well find one when earnings season kicks off later this week. Markets have been in disarray since the start of February after inflationary pressure rattled bond yields and triggered one of the sharpest stock corrections in history. The S&P 500 is now down 3% year to date as risks of a trade war with China and regulations of Big Tech loom large.
The hope is a string of strong headline numbers from corporate America can allay those fears and reignite the stalling bull run. Even more important, companies must reassure investors about future earnings power with robust forward guidance. The narrative in 2016 revolved around the strong US dollar, last year was the uncertainty of President Trump’s first year in office, and today the conversation of tariffs and other protectionist policies will hang over corporations.
Still, first quarter earnings season is shaping up to be the strongest in seven years. On Friday, JPMorgan Chase (JPM) and other banks will be among the first big US corporations to report. The financial sector has recorded some of the largest increases in estimated growth since the start of the quarter. Analysts now expect the financial sector to post a 20% increase on the bottom line, according to Factset. Most of that comes from upward revision activity for JPMorgan Chase and Bank of America (BAC), the two largest contributors to the financial sector.
The current environment plays right into the hands of financial institutions. Rising rates, tax reform, and volatile markets are all tailwinds for earnings which depend on net interest margins and revenue from trading activity. But it’s possible these factors have already been baked into share prices and anything short of triple-digit growth will punish the sector. The market’s response is just as important as the actual report and will set the tone for the rest of earnings season. Tepid price reaction on better than expected results could spell trouble for the market.
Other sectors expecting standout results include technology, energy, and materials. Both energy and materials are looking to regain January’s highs on the back of improving oil prices, strong economic momentum and easy comparisons. Analysts expect the two sectors to post over 40% growth on the bottom line and above 15% on the top. By contrast, technology faces tough comparisons and forthcoming privacy regulations that may impact earnings potential of large companies like Facebook (FB). Yet, analysts are still counting on the sector to produce another exceptional quarter. Current estimates predict double-digit earnings growth in 5 of the 7 industries within technology, led by semiconductors, internet software & services, and hardware.
The earnings momentum isn’t stopping in the first quarter either. For the fiscal year, analysts project earnings for S&P 500 companies to increase by 18.4% with revenue growth of about 7%, according to Factset. That would stretch the forward P/E ratio to 16.5, well above the 5 year and 10 year averages.
Despite the lofty expectations, there’s growing concern that Wall Street will ignore earnings fundamentals. Recent trading activity has been driven in large part by remarks from the White House along with potential actions the Federal Reserve might take to combat inflation. This has overshadowed the strong earnings growth in Corporate America for the past few quarters. Investors are looking past both good and bad results in what’s shaping up to be the best consecutive quarters since 2011. That potentially stems from a lack of confidence in corporate fundamentals beyond the current fiscal year. US companies will face tougher comparisons without the one-time windfall of corporate tax cuts in addition to rising interest rates that will ultimately weigh down the profitability of large multinationals.
Even so, fundamentals can still be a positive driver for the market going forward. It just may not have the same influence on investor’s decisions as in previous generations. After all, earnings are barometer of the corporate sector and thereby affect economic growth and price movement
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
