FILE PHOTO: Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., September 19, 2024. REUTERS/Brendan McDermid/File Photo
NEW YORK: Earnings season is here, and the US stock market’s furious US$9 trillion 2024 rally is facing perhaps its biggest test of the year.
Strategists are predicting that companies in the S&P 500 Index will post their weakest results in the past four quarters, with just a 4.3% increase in third-quarter profits compared with a year ago, Bloomberg Intelligence data show.
In mid-June, projections were for an 8.4% rise, and in the second quarter growth soared to 14%.
Despite the shrunken expectations, the S&P 500 hit another record high last Friday and is up 22% in 2024, its best start to a year since 1997.
Investors who keep bidding up stock prices may be onto something, because there appears to be room for an upside earnings surprise if those reduced forecasts turn out to be overly gloomy. It happened in the first quarter, when expectations were for 3.8% growth and it turned out to be 7.9%.
“Analysts lowered earnings per share estimates more than is typical heading into reporting, which could lead to an elevated beat rate and better equity performance across the quarter,” said Ross Mayfield, investment strategist at Baird.
Earnings season unofficially kicked off last Friday, led by financial bellwethers JPMorgan Chase & Co, Wells Fargo & Co and BlackRock Inc.
More key companies will deliver results this week, including Citigroup Inc, Netflix Inc and JB Hunt Transport Services Inc.
Here’s a look at five key themes to watch as the results roll in.
> AI slows down
The bulk of the growth in S&P 500 earnings continues to come from the big-technology companies that are seen as major beneficiaries from the development of artificial intelligence.
The so-called Magnificent Seven firms –Apple Inc, Microsoft Corp, Alphabet Inc, Amazon.com Inc, Nvidia Corp, Meta Platforms Inc and Tesla Inc – are expected to post an 18% rise in profits in the third quarter.
Their issue is the rate of increase is slowing, down from more than 30% in 2023, according to BI.
For the rest of the S&P 500, profits are expected to climb 1.8% in the July-September period, which would be their second straight quarterly increase, albeit barely, BI data show. They posted 9.1% growth in the second quarter.
> Stock picker’s paradise
Investors should expect some major swings in individual stocks that don’t show up in the broader index.
The options market is pricing in the biggest average post-results implied move at the single-stock level since 2021, when Bank of America Corp (BofA) started collecting the data.
But implied volatility at the index level is relatively muted, a sign that this earnings season could be a “stock picker’s paradise,” the firm’s strategists including Ohsung Kwon wrote in a note to clients.
> All about margins
Wall Street pros will be closely watching profit margins, which is a key measure of how effective companies have been at squeezing earnings out of their sales.
Net-income margins are expected to slip to about 12.9%, less than the 13.1% reported in the second quarter but slightly higher than 12.8% in the third quarter of 2023, data compiled by BI show.
The mild dip reflects the challenges some firms face in passing on input costs to costumers as wage pressures remain sticky in several low-productivity industries that are difficult to automate.
> Choppy European markets
In Europe, this earnings season could mark a turning point for the Stoxx 600 Index, which is hovering near record highs.
Analysts cut profit estimates going into the third quarter, with a Citigroup index showing downgrades outnumbering upgrades since mid-June.
Meanwhile, regional economies are seeing anemic growth, and manufacturing powerhouse Germany has forecast a contraction for a second year.
> Election focus
With the US presidential election only weeks away, investors will be listening for mentions of economic and trade policy risks and other political issues from corporate executives.
About 110 companies mentioned the word “election” in their second-quarter earnings calls, up 62% from four years ago, BofA data show. — Bloomberg
