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

AInvestThursday, Apr 11, 2024 1:52 pm ET
3min read

For the first-quarter earnings season, the S&P 500 companies are expected to report a modest 3% year-over-year increase in sales and earnings per share (EPS), with the top 10 stocks projected to drive most of the growth. Analysts anticipate a 3% increase in EPS across the S&P 500, marking a slowdown from the previous quarter but still the most ambitious pre-season target since Q2 2022. The Utilities sector is expected to lead in EPS growth, while Energy and Materials are projected to face declines due to stagnant commodity prices.

The Market Generals

The first quarter of the year marked a significant period for the stock market, with the S&P 500 achieving 22 record closes and an increase of over 10% in the first three months, a rare occurrence since 1950. This upward trajectory sets a positive backdrop as big banks prepare to announce first-quarter earnings. Despite potential weak spots, the general sentiment leans towards companies meeting, if not exceeding, investor expectations. 

This optimism is bolstered by the performance of the Magnificent Seven megacap tech companies, with analysts raising their earnings per share estimates significantly for most, reflecting broader confidence in these tech giants' growth prospects for the near future.

While megacap tech companies have seen their forecasts upgraded, the broader index has experienced a cut in first-quarter estimates by about 2.7%. This divergence highlights the significant impact that the tech sector, particularly companies like NVDA and META  has on market expectations and the pressure on these giants to deliver compelling results in the upcoming earnings season. Such dynamics underscore the influence of tech profitability, alongside other sectors like semiconductors and consumer services, in driving market trends, especially as the economy shows signs of acceleration.

Looking ahead, the market faces potential volatility, influenced by factors such as rising oil prices and uncertainty around interest rate cuts. The disparity in performance among the S&P 500's largest stocks, demonstrated by the varied year-to-date results of companies like NVDA and TSLA, raises questions about the sustainability of their growth. 

With the tech sector's significant role in the index, the ability of these companies to maintain their earnings momentum will be crucial for the continued upward movement of the S&P 500, despite historical concerns of market corrections akin to the Tech Bubble era.

Batting Leadoff- The Financials

Financials will start the parade as per usual. When your entire business is about your balance sheet you tend to be well prepared to report results.

The largest U.S. banks, including JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, are poised to achieve higher profits from their lending businesses this year than previously expected. This shift in forecast comes as the Federal Reserve is likely to implement only modest reductions in benchmark interest rates, contrary to the more significant cuts anticipated earlier. 

Over the past two years, these financial institutions have increased loan charges in alignment with the Fed's rate hikes, while not fully passing these increases on to depositors. Despite initial warnings to investors about a potential decline in net interest income for 2024 due to expected rate cuts and a shift of savings into higher-yielding accounts, analysts now believe banks could revise their financial outlooks upwards as they begin reporting first-quarter results.

Despite this optimistic view on net interest income, the average net income across these six major banks is expected to drop by about 14% for the first quarter of 2024, influenced in part by fees related to the Federal Deposit Insurance Corporation's efforts to recoup losses from the collapses of Silicon Valley Bank and Signature Bank. 

Additionally, trading revenues are forecasted to decrease by roughly 6%, reaching their lowest level since the start of 2020, while investment banking revenues are expected to improve from the previous year's low base, driven by a resurgence in mergers, acquisitions, and underwriting activities. Despite these varied forecasts, the uptick in significant takeover deals offers a hopeful sign of stronger investment banking revenues in the latter part of the year, even if immediate gains from these transactions are yet to materialize.

One key area to watch is the credit conditions. Analysts anticipate that the collective charge-offs — loans deemed non-recoverable — for JPMorgan, Bank of America, Citigroup, and Wells Fargo will surge to approximately $6.7 billion in the first quarter, rising from $3.85 billion in the previous year. Despite this increase in losses, analysts consider the situation to be within manageable levels. Investors will want to track the bank's actions around reserves for an indication of where they see this metric headed. A rise in credit costs would be a red flag for the broader economy. 

Conclusion

As the first quarter of 2024 concludes, the equity markets have demonstrated remarkable resilience, overcoming volatility driven by macroeconomic factors and Federal Reserve policies. The S&P 500, marking 22 record closes and a more than 10% increase, heralds an optimistic outlook for the earnings season led by financial giants like JPMorgan Chase, Wells Fargo, and Citigroup. 

Despite rising yields and varied sector performances, the anticipation of strong sales and EPS growth among the top S&P 500 companies fuels market optimism, with a keen focus on the influence of artificial intelligence on sectors such as semiconductors and consumer services. 

Meanwhile, the financial sector braces for mixed outcomes, balancing expected profit rises in lending against challenges like a projected 14% drop in net income for major banks, attributed to regulatory fees and increased loan loss provisions. 

The forthcoming earnings reports, especially from megacap tech firms and financial institutions, are poised to provide critical insights into consumer health, AI sector trajectories, and the overall economic landscape, reflecting on the intricate balance between optimism and caution in the face of evolving market dynamics and Federal Reserve policies.

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.