Apple's (AAPL) March quarter earnings, due later this week, could prove crucial for market direction heading into the summer months as investors look through the failure of First Republic (FRC) and increasingly discount the chances of further Fed rate hikes beyond Wednesday's policy meeting in Washington.
U.S. stocks, which had one of the strongest pre-earnings advances on record, are now on pace for their highest close of the year following a set of mixed earnings from big tech names such as Amazon (AMZN), Microsoft (MSFT), Meta Platforms (META) and Google (GOOGL) last week and the relatively clean wind-down of First Republic over the weekend.
A mixed March inflation report from the Bureau of Economic Analysis Friday, which showed moderating headline price pressure with stubbornly high levels at the core, did little to alert market expectations on the Fed's next move, as traders continue to price in at least a 93% chance of a 25 basis point rate hike, which would take the Fed Funds rate to a range of between 5% and 5.25%, a level that is likely to remain in place until November.
We came into this earnings season with equity markets up mid-single percentages already," said BMO Wealth Management's chief investment strategist Yung-Yu Ma. "That quite strong position means some of the expectations to take the market another leg higher perhaps were too heavily priced."
"We are expecting an economic slowdown going forward, as lending standards and liquidity tighten, and credit becomes less available." he added. "That's part of the ongoing recalibration process that we've been expecting to take place this year for a few more months or a couple of quarters."
Beating and Guiding Higher
That said, with around half of the S&P 500 reporting March quarter profits, nearly 78% have topped Street earnings forecasts, besting both the 73.5% average recorded over the past four quarters and the longer-term average of around 66.3%. Data from Bank of America, in fact, suggests that 65% of reporting companies have issued earnings guidance that topped Street forecasts, the best since the third quarter of 2021.
That hasn't however, had a meaningful impact on the overall total, which is projects collective S&P 500 profits will fall 1.9% from last year to $433.6 billion. That figure is set to accelerate, with second quarter earnings forecast to fall 4.3%, although the tally improves to a 0.6% gain once profits from the energy sector are stripped away.
"All in, this earnings season has been OK," said Dylan Kremer, CIO at North Palm Beach, Florida-based Certuity. "Earnings projections still seem a bit lofty to us, particularly in the back half of this year, which means there is still some room for disappointment."
"While the recent earnings contraction was largely priced in, we expect tighter lending conditions, cost pressures, and slower economic growth to continue to be a headwind to earnings," he added. "However, despite these headwinds, sentiment still remains bearish, and earnings could stay relatively resilient on the back of a strong consumer and labor market."
Tech earnings weren't strong enough to dispel some of that bearish concern, although for the most part the quartet of updates from the biggest U.S. companies -- and some of the heaviest weights on the S&P 500 -- were more than sufficient.
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In fact, one of the underrated aspects of this earnings season has been the resilience of revenue growth, which is in many respects a better judge of economic and consumer strength, particularly in a market that has been dominated by tech sector job cuts over the past four months.
Earnings can be flattered by cost cuts, accounting conventions and tax breaks, but sales are a largely consistent metric for broader business growth.
Microsoft, Google and Meta all posted stronger-than-expected first quarter sales, with only Amazon spooking investors with a grim outlook for growth in its powerhouse Web Services division.
What Matters Is What's In The Till
In fact, the current beat rate for Street revenue forecasts is around 72.6%, according to Refinitiv data, some 10 percentage points over the long-term average, although the 'surprise factor' (or the level at which those forecasts are being beaten) is below the 2.3% notched over the previous four quarters.
It's worth noting that, while earnings can flatter a mixed quarterly update, big tech reports themselves can have an outsized impact on broader market performance. Just five stocks -- Apple , Microsoft, Google, Meta and Nvidia (NVDA) -- have driven nearly two-thirds of the benchmark's 9.2% advance so far this year, despite representing only around a fifth of its market cap.
"The narrative for the tech sector is becoming clearer," said Wedbush analyst Dan Ives. "Cloud growth is stable and very resilient, digital advertising is holding up and seeing moderating tailwinds and enterprise IT budgets are showing modest growth with some weak spots."
That puts Apple's March quarter earnings firmly in frame, with the tech giant set to report after the close of trading on Thursday. Analysts expect it will post a bottom line of $1.43 per share, down 6% from last year, with revenues falling 4.4% to just under $93 billion.
Apple posted its first quarterly earnings miss in six years, alongside its first annual revenue decline since 2019, in early February as supply chain snarls in China limited the availability of its high-end iPhones and fading consumer demand dented personal computer sales.
Apple said iPhone sales, however, would accelerate over the three months ending in March, adding that overall gross margins would improve to between 43.5% and 44.5%, with CEO Tim Cook adding that "production is where we want it to be" heading into the start of the calendar year.
"With Big Tech showing impressive resiliency during earnings season the last few weeks now the baton is handed to Cook as investors all look towards Apple's Thursday night print/guidance with the tech finale on 1Q," Ives said.
"The entire Street will be laser focused on Apple's quarter as when Cook talks everyone else listens given Apple's unique perch and perspective around global consumer demand," he added.
