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Wall Street is expecting a subdued earnings season from Corporate America despite the first-quarter\u2019s stock market fireworks.<\/p>\n
Yes, the S&P 500 Index\u00a0rose 10%\u00a0from January to March. Strategists, however, predict that S&P 500 companies will post their smallest year-over-year profit growth since 2019, just 3.9%, in the first quarter, according to data compiled by Bloomberg Intelligence. But in this case the market may be onto something, because those forecasts could very well turn out to be overly gloomy \u2014 like they were in the fourth quarter, when expectations were for\u00a0around 1% growth<\/a>\u00a0and the actual results turned out to be\u00a0over 8%.<\/p>\n \u201cWith traders anticipating interest-rate cuts by the Federal Reserve later this year, that will likely feed into even stronger consumer spending, economic activity and, in turn, better earnings growth and higher stock prices,\u201d\u00a0Wendy Soong, senior analyst at BI, said over the phone.<\/p>\n Earnings season kicks into full swing Friday, with\u00a0JPMorgan Chase & Co.<\/a>,\u00a0Wells Fargo & Co.<\/a>\u00a0and\u00a0Citigroup Inc.<\/a>\u00a0reporting. Other companies including\u00a0BlackRock Inc.<\/a>\u00a0\u2014 world\u2019s largest asset manager \u2014 and\u00a0State Street Corp.<\/a>, along with\u00a0Delta Air Lines Inc.<\/a>\u00a0will deliver results this week.<\/p>\n Here\u2019s a look at five key themes to watch:<\/p>\n A resilient economy and strong consumer demand are expected to fuel a rise in earnings growth for S&P 500 companies for a second straight quarter following three straight quarters of profit contraction. And strong margins from big tech firms will likely be a key driver.<\/p>\n Profits for the seven biggest growth companies in the S&P 500 \u2014\u00a0Apple Inc.<\/a>,\u00a0Microsoft Corp.<\/a>,\u00a0Alphabet Inc.<\/a>,\u00a0Amazon.com Inc.<\/a>,\u00a0Nvidia Corp.<\/a>,\u00a0Meta Platforms Inc.<\/a>\u00a0and\u00a0Tesla Inc.<\/a>\u00a0\u2014 are on course to rise 38% in the first quarter, according to Bloomberg Intelligence. When excluding them, the rest of the index\u2019s profits are anticipated to shrink by 2%.<\/p>\n Wall Street expects this trend to reverse as the year progresses. In the fourth quarter, those seven firms are expected to post earnings growth of 15% compared with 18% for the rest of the S&P 500, according to data compiled by\u00a0David Kelly, chief global strategist at JPMorgan Asset Management.<\/p>\n Analysts have been raising their earnings forecasts faster than they are marking them down for previously unloved groups, from health care to utilities.<\/p>\n In fact, seven of 11 sectors in the S&P 500 are poised to see profit growth accelerate over the next year. Utilities, financials and health care are the lead sectors when ranked by 25th-percentile earnings revisions, with energy, materials and communication services at the bottom, BI data show.<\/p>\n Corporate cash and free cash flow are at record high levels, setting the stage for a recovery in how the largest US companies deploy their capital, whether through payouts to stockholders or investing in expanding their businesses.<\/p>\n Shareholder payouts rebounded in the fourth quarter for S&P 500 companies, and buybacks revived after four consecutive quarters of declines, BI data show. An increase in capital expenditures will depend on a rebound outside the heavy-spending technology sector, BI\u2019s Soong said.<\/p>\n Traders will be keeping a close eye on operating margins, a key gauge of profitability that historically offers a signal on where a company\u2019s stock price is headed.<\/p>\n The gap between rising consumer and producer prices has narrowed significantly over the past year thanks to corporate cost-cutting that drove profits higher, as well as an unexpected artificial intelligence boom. Analysts now see operating margins for the first quarter at 15%, with the worst of the pain in the rear-view mirror as forecasts improve in the coming quarters, data compiled by BI show.<\/p>\n Traders aren\u2019t expecting share prices to move in unison this earnings season. Differing inflation outlooks for S&P 500 sectors has left a gauge of expected one-month correlation in the index\u2019s stocks hovering near its lowest since 2018, Bloomberg data show. A reading of 1 means securities will move in lockstep, it\u2019s currently at 0.16.<\/p>\n This comes as three of the 11 groups \u2014 communication services, technology and utilities \u2014 are expected to post profit expansions of more than 20%, while energy, materials and health-care companies will likely see profits shrink. Contrary to popular belief, moderate inflation historically has been good for earnings broadly because it promotes growth, lending and borrowing, according to\u00a0Dan Eye, chief investment officer at Fort Pitt Capital Group.<\/p>\n \u201cEarnings are in nominal terms, so having a little inflation in the system isn\u2019t a bad thing for corporate profits,\u201d Eye said. \u201cThe stock market clearly sniffed that out in the first quarter, given the big rally.\u201d<\/p>\n \u2014 With assistance from Elena Popina<\/em><\/p>\nConcentrated Growth<\/h3>\n
Raising Expectations<\/h3>\n
Cash Hordes<\/h3>\n
Margins Improving<\/h3>\n
Sector Picking<\/h3>\n
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