U.S. stocks are priced close to perfection heading into the teeth of the first-quarter earnings season. And that means even better-than-expected results from the biggest S&P 500 companies likely will mean little upside moves for markets heading into the traditional "sell in May" lull.
Stocks, in fact, are in the throes of the strongest pre-earnings runup since the 2008 global financial crisis. The S&P 500 has risen just under 6% in the past month even as economic data show weakness in the broader economy and struggles in the banking sector.
The runup was given some added heft as well from the reporting season's solid start. Bank of America data show that of the 30 companies that have published March-quarter earnings so far, around 90% have topped Wall Street forecasts, marking "the highest post-Week 1 surprise statistic back to at least 2012."
Earnings guidance, however, has been wavering. Around 81 companies have issued negative earnings preannouncements heading into the reporting season, compared to 26 positive ones. And the overall earnings-growth estimate has fallen 3.3% since the beginning of February.
“Corporate guidance in earnings season is critical for the wider economy because it provides insight into the future expectations of companies, which will impact investor sentiment and overall economic activity,” said Nigel Green of London-based deVere Group.
Revenue growth has also been muted, with two-thirds (66.7%) of reporting companies topping Refinitv sales estimates, compared with the 71% pace recorded over the previous four quarters.
That suggests that as inflation pressures ease, revenue growth will slow in tandem, adding to pressures on profit margins for companies that don't cut costs or trim their workforces.
Consumers' Inflation Is Someone Else's Revenue
"Revenue will hold up fine -- the inflation we pay is more revenue for someone else -- but analysts will be sharpening their pencils when it comes to costs," said Jeffrey Buchbinder, chief equity strategist for LPL Financial in Boston.
"During fourth quarter earnings season, a number of companies were rewarded for cost-cutting measures, particularly in the technology sector," he added. "For this upcoming earnings season, expect more of the same."
Friday's better-than-expected first-quarter updates from big lenders such as JPMorgan (JPM), Citibank (C) and Wells Fargo (WFC) failed to lift the benchmark into the close of trading, but still helped the Dow to its fourth consecutive weekly gain. That was the best run of advances since October, and steadied nerves after last month's collapse of Silicon Valley Bank.
JPMorgan had its best single-day gain in two years, in fact, after it blasted Wall Street forecasts. Its bottom line rose 52% from a year earlier to $12.62 billion, or $4.10 a share, on revenue of $38.35 billion.
Citi and Wells Fargo were also impressive, but the latter nudged lower into the close after Chief Financial Officer Mike Santomassimo noted the bank would "to position the portfolio for a slowing economy."
“The big banks are keenly watched, as not only do they often set the mood music for the rest of the season, but also because they are more intricately linked to the rest of the economy than most other sectors," deVere Group's Green said.
Top Companies Set to Report Earnings This Week
Wall Street will likely shift focus to the broader economy this week as 62 S&P 500 companies are set to report. Investors will be tracking the pressure on profit margins from the recent pullback in inflation, and worries about stresses in the banking sector are lingering.
Tesla (TSLA), Johnson & Johnson (JNJ), IBM (IBM), Lockheed Martin (LMT), United Airlines (UAL), Procter & Gamble (PG), AT&T (T) and Netflix (NFLX) are a few of the blue-chip names slated to publish March-quarter earnings over the next five days.
Collective S&P 500 profits are forecast to fall 4.8% from a year earlier to around $420.7 billion, according to Refinitiv forecasts. Such a tally would confirm the first so-called earnings recession -- defined as two consecutive quarters of contracting profits -- since the covid pandemic. Fourth-quarter profits fell 3.2% to a share-weighted $440.9 billion.
"Investors are counting on strong earnings to help the year-to-date stock market rally continue, which is why this upcoming first-quarter reporting season is so important," said David Trainer, chief executive of investment research group New Constructs in Nashville.
Fed Rate Headwinds Hold Back Pricey S&P 500
Adding to this year's market performance could be difficult, however, as the S&P 500 remains historically expensive on a price-to-earnings basis. Forward PE multiples are at 18 times, some 17% higher than the figures from early October.
Treasury bond yields, meanwhile, have been marching higher for much of the past week, following a mixed reading for monthly inflation and a hawkish tone from minutes of the Federal Reserve's most recent policy meeting in March.
Benchmark 2-year notes yields were pegged at 4.201% in early New York trading Monday with 10-year notes changing hands at 3.598%.
CME Group's FedWatch, meanwhile, suggests an 86.8% chance of a 25-basis-point (0.25 percentage point) Federal Reserve rate hike next month in Washington. That move would take the federal-funds rate to between 5% and 5.25% and add to headwinds for the S&P 500 heading into the summer months.
Growth prospects are beginning to dim, however, amid concern that less-available credit will choke off new investment, triggering a slowdown in hiring and a corresponding pullback in GDP.
Activity in the most important sector of the U.S. economy slowed notably last month, according to data from the Institute of Supply Management's benchmark survey. Two important subcomponents -- measuring employment and prices paid -- indicated cooling inflation pressures heading into the spring.
The ISM's March survey of manufacturing activity, meanwhile, was pegged at 46.3 -- well below the 50 mark that separates growth from contraction. Meanwhile, Bank of America's weekly Flow Show report noted that readings below 45 have preceded every U.S. recession for the past seven decades.
But Gina Bolvin, president of Bolvin Wealth Management Group says the market could remain resilient as traders bet that the Fed pauses rate increases and the broader economy potentially avoids recession.
"While we don’t think earnings season will bring much in the way of good news, expectations are low enough that we may see stocks hold up again after results, just as they generally did during fourth quarter earnings season in late January through mid-February," she said.
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