The earnings season has kicked off with 10 S&P 500 companies reporting, most of which were banks reporting better-than-expected earnings. This week, 41 more S&P 500 companies are scheduled to report, with a focus on bank and financial earnings. Companies such as Charles Schwab, Goldman Sachs, Bank of America, and others are set to release their earnings reports, along with companies like Johnson & Johnson, Netflix, and Procter & Gamble. The S&P 500 slumped by 1.5% last week, with the Magnificent 7 tech companies bucking the trend with a 1% gain.
Despite a rise in Treasury yields, economically sensitive cyclical stocks outperformed less-sensitive staples. The market remains seemingly unconcerned about the risk of a recession despite rising yields. Blended earnings for the quarter are currently below forecasts, with net interest income guidance not meeting expectations for banks. Progressive Insurance reported strong earnings, boosting the sector’s estimates. However, the healthcare sector has been a detractor from S&P 500 earnings growth, with Bristol-Myers Squibb slashing estimates due to an acquisition-related accounting issue.
Sales growth is expected to benefit from solid nominal GDP growth for the first quarter, with revenues expected to have a tailwind. The blended earnings growth rate for the quarter is currently at -0.9% year-over-year, below the earlier expectation of +3.5%. Inflation remains a concern, with the March CPI coming in higher than expected at 3.5% year-over-year. The rise in supercore CPI, which measures services inflation, may challenge the Federal Reserve’s narrative of wage growth not driving inflation. The increase in Treasury yields has lowered the probability of a June Fed rate cut to 30%, with expectations shifting towards a rate cut in July.
As earnings season progresses, the focus will be on bank earnings, which may be impacted by concerns about future lending income. Regional banks, in particular, may be vulnerable due to their exposure to the troubled office real estate sector. Attention will be on management’s future earnings guidance, with the first quarter expected to be the trough earnings growth for the year. Despite concerns about inflation, stocks have continued to be supported by economic growth. The upcoming March retail sales release will provide further insight into the strength of the U.S. consumer and economy.
