Resilient corporate earnings growth has been a major driver of the market, and one analyst said Monday that the upcoming first-quarter reporting season could reflect the positive impact of an improving business environment and continued strength in technology.
Bar neither high nor low: Unlike the fourth-quarter reporting season, when consensus estimates fell 6.8% between October and December, the picture is different this quarter, LPL’s Financial Chief Equity Strategist said. Jeffrey Buchbinder in its preview.
This time, the consensus was only cut by 2.5% between January and March, and so the bar wasn’t that low, he said.
The analyst believes the typical three to four percentage point upside from current estimates is achievable, potentially pushing S&P 500 earnings per share growth for the quarter to around 6%.
Positives and pushbacks: Buchbinder provided some data to lend credence to his view that economic fundamentals were consolidating and these include:
- Consensus GDP growth estimate tracked by Bloomberg rising 0.5% to 2% from early 2024
- The Institute for Supply Management’s manufacturing purchasing managers’ index enters expansion territory in March
- The Citigroup Economic Surprise Index rose from -2.4 in January to +39 in April
- green shoots emerging in Europe and China
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The analyst also viewed sticky inflation as a positive factor for revenue growth, given that inflation is the pricing power. He estimated that first-quarter revenue may have grown 4% year-over-year, matching the pace seen in the fourth quarter.
Higher crude oil and copper prices may have helped the natural resources sector mitigate the earnings decline, Buchbinder said. According to him, the double-digit drop in natural gas prices could have a countervailing impact.
On the other hand, the dollar’s strength could negatively affect earnings of companies operating around the world, as the greenback appreciated by 3% during the quarter, the analyst said. Other challenges highlighted by the analyst include:
- wage pressures
- cumulative effects of inflation
- increase in interest rates on consumer spending power
- navigation interruptions due to the collapse of the Baltimore bridge
- the increasing difficulty in exceeding expectations as the economic cycle matures.
“Putting all of this together, our best guess is about 3% upside and 6% earnings growth,” Buchbinder said.
Big tech outperformance: As seen in the fourth quarter, big tech companies will once again do the heavy lifting, the LPL analyst said. Five of the Magnificent Seven stocks are expected to post earnings growth in the first quarter, driving a more than five percentage point increase in S&P 500 earnings per share this quarter, she said.
Alphabet, Inc. GOOGLE GOOG, Amazon, Inc. AMZN, Microsoft Corp. MSFT, Meta Platforms, Inc. HALF AND Nvidia Corp. NVDA will likely see year-over-year earnings growth, while The Apple company. APPL AND Tesla, Inc. TSLA they are prepared to see a decline in earnings, he said.
“As a group, the Mag 7 is expected to report earnings growth close to 40% year over year, while the rest of the S&P 500 – the 493 – will have to deliver some healthy upside just to match the year-ago quarter’s earnings. ,” he added.
“But more importantly, the time when the ‘493’ will start contributing to overall profits is getting closer,” the analyst said, referring to S&P 500 companies without the Magnificent Seven.
Buchbinder said he expects “American companies to deliver typical upside to expectations in the quarter and generate S&P 500 earnings growth of about 6%.” “The economic environment and investment in AI continue to support corporate profits, so downside surprises this earnings season seem unlikely,” the analyst said. Estimate cuts are unlikely, although currency headwinds could temper guidance slightly, he added.
THE SPDR S&P 500 ETF Trust Fund TO SPYan exchange-traded fund that tracks the broader S&P 500 index fell 0.03% to $518.58 in premarket trading Tuesday, according to data from Benzinga Pro. In the first quarter the ETF rose by 9.47%.
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