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Q1 Earnings Preview- Corporate steps into the Earnings Confessional, what you need to know (Part I)

AInvestWednesday, Apr 10, 2024 5:30 pm ET
3min read

Equity markets have experienced significant fluctuations and volatility in recent weeks. The broader landscape has been heavily influenced by macroeconomic data, with stock movements keenly responsive to each statement from the Federal Reserve, alongside numerous volumes and economic analyses. A sharp rise in yields, triggered by a higher-than-expected Consumer Price Index (CPI) reading and disappointing outcomes from recent 3-year and 10-year bond auctions, is likely to exert additional pressure on equity investments. However, investors might find a brief moment of relief as the focus shifts to the upcoming earnings report season.

The upcoming first-quarter earnings season kicks off Friday, starting with major banks JPMorgan Chase, Wells Fargo, and Citigroup. By May 3rd, over 85% of the S&P 500's market capitalization and the same percentage of its companies will have shared their first-quarter earnings.

Companies within the S&P 500 are expected to report a modest year-over-year increase in sales and earnings per share (EPS) of +3%, amidst predictions of stagnant margins. The top 10 stocks are projected to do the heavy lifting with sales and EPS growth projected to be +15% and +32%, respectively. This contrasts sharply with the +2% and -4% growth forecasted for the rest of the 490 companies in the index. 

The consensus among analysts is for a 3% year-over-year increase in earnings per share (EPS) across the S&P 500, marking a slowdown from the 8% growth observed in the previous quarter's earnings season. Interestingly, this quarter's forecasted growth rate is the most ambitious pre-season target set by analysts since the second quarter of 2022. It's worth noting that over the last four quarters, the actual aggregate results have consistently surpassed the pre-season EPS growth forecasts by an average of 4 percentage points.

The Utilities sector is anticipated to lead with the highest expected EPS growth at 23%, while Energy and Materials are projected to face the sharpest declines, with EPS dropping by 27% and 24% respectively, largely due to the impact of stagnant commodity prices. 

Communication Services, Information Technology, and Consumer Discretionary sectors are also poised for strong growth in the first quarter, driven by the substantial earnings increases of the largest S&P 500 companies, despite a forecasted 3% EPS contraction for the median stock in the Communication Services sector.

The Burning Questions for Q1

Will AI continue to drive the overall market performance? The stock market segments most closely tied to artificial intelligence (AI) are anticipated to exhibit the highest sales growth this quarter, with NVDA leading the pack with an expected year-over-year sales increase of 239%. The growth driven by AI's expansion is becoming more widespread, affecting not only individual companies like SMCI and MU but also the broader semiconductor sector and AI infrastructure stocks. Amid discussions on AI investment and adoption levels among firms, with many still in the early stages of engagement, the focus on AI's influence is set to remain a dominant theme in first-quarter earnings calls. 36% of S&P 500 companies mentioned AI on earnings calls. 

The Strength of the Consumer? First-quarter results will shed light on consumer strength. Recent economic data indicates robust consumer spending and a solid labor market, with real personal spending increasing by 0.4% in February and nonfarm payrolls rising significantly in March. Despite these positive indicators, subdued consumer confidence and disappointing forward guidance from consumer-facing companies like COST, LULU, NKE, and ULTA, along with specific remarks on a challenging consumer environment from MCD's CFO, suggest potential underlying weakness. Todays CPI data, specifically the rise in gasoline prices will raise further questions. The consensus for the upcoming reporting season remains optimistic, expecting strong first-quarter earnings per share (EPS) growth across most consumer subsectors, with Consumer Services projected to experience the fastest revenue growth at 11%.

Can the Megacaps continue to carry the load? The top 10 companies in the S&P 500 are anticipated to significantly outperform the rest, with sales expected to increase by 15% year over year and EPS growth forecasted at 32%, in stark contrast to the modest 2% sales growth and 4% decline in EPS for the other 490 companies. Notably, upward revisions in EPS for these leading stocks have resulted in overall more favorable revisions for the S&P 500 index than the historical average since 1985, despite a general consensus cut of 1% for 2024 EPS since mid-2023. This divergence in performance and outlook among the largest stocks, as evidenced by NVDA's and META's impressive gains versus TSLA's and AAPL's declines, raises questions about whether such disparities will be mirrored in the first quarter's operating results, amidst concerns of potential market corrections similar to the Tech Bubble era.

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.