The upcoming earnings season is expected to see modest growth, with a 3.5% increase in both earnings and sales year-over-year. Inflation has increased slightly, but profit margins are expected to remain steady due to the balance between input costs and pricing. Forward earnings guidance will be crucial, as the first quarter is predicted to have the slowest earnings growth of the year.
This week, ten S&P 500 companies are set to report earnings, with a major focus on bank earnings. Financials are expected to see a 1.7% growth in earnings, but banks within the sector are expected to post an 18% decline, mainly due to weak loan growth and increasing reserves for potential losses. Other sectors like insurance and communications services are expected to see strong earnings growth, benefiting from various factors like easier comparisons and improved loss ratios.
The communications services sector is expected to report the most robust year-over-year earnings growth at 19.4%, with Meta Platforms being a significant contributor to this increase. The consumer discretionary sector is also expected to see outsized earnings growth at 16%, driven largely by Amazon. However, excluding Amazon’s results would show a decline in earnings for the sector, as seen in companies like Lululemon Athletica and Ulta Beauty issuing disappointing guidance.
The materials and energy industries are expected to have the most significant declines in year-over-year sector revenues, primarily due to lower natural gas prices. Despite this, sales growth is expected to be supported by solid economic activity, with nominal GDP growth contributing to a 3.5% year-over-year sales increase for the S&P 500. Inflation, which has been trending lower, is also expected to help earnings by keeping profit margins steady.
The U.S. dollar is not expected to have a significant impact on multinational companies this quarter, despite around 40% of their sales coming from international sources. Market odds of a Fed easing in June have fluctuated, with a strong jobs report throwing doubt on the possibility of a rate cut. However, the probabilities still favor a rate cut in June or July, with Fed Fund futures anticipating two to three cuts of 25 basis points each in 2024.
Overall, the first quarter’s low single-digit year-over-year earnings gains are expected to be exceeded, supported by resilient economic growth. Attention will be focused on management’s future earnings guidance, as well as the consumer and producer inflation readings for the impact on Fed rate cuts. With the first quarter expected to have the weakest earnings growth of the year, the market will be closely watching for any signs of economic trends that may affect future earnings forecasts.
