The Stock Rally Has Stalled. Now Comes Earnings Season
Wall Street expects S&P 500 companies to report second straight quarter of earnings growth
After a recent pullback in stocks, investors are looking to the coming earnings season for clarity on companies’ growth prospects.
U.S. stocks defied expectations to rally in 2023 but have struggled to extend gains into the new year. The S&P 500 shed 1.5% in the first week of January. Tech stocks, which led the market last year, have stumbled, with Apple and Microsoft falling 5.9% and 2.2%, respectively, in the past week.
For many investors, quarterly results and commentary from executives will help signal if the recent stock-market declines are warranted or whether companies’ profits are strong enough to renew the rally.
“This is a very interesting and important earnings season to get confirmation on fundamental trends,” said Raheel Siddiqui, senior investment strategist at Neuberger Berman.
Analysts expect companies in the S&P 500 to report a second straight quarter of earnings growth. Profits for the fourth quarter are projected to have risen 1.3% from the same period a year earlier, according to FactSet.
That is down from the 8% profit growth analysts had projected at the end of September. For all of 2023, Wall Street now expects earnings grew 0.8% from 2022.
In the week ahead, investors will get results from some of the country’s biggest banks, including JPMorgan Chase and Bank of America, as well as Delta Air Lines and UnitedHealth Group. They will also get fresh inflation data likely to influence the Federal Reserve’s plans on interest rates.
Much of the optimism that propelled stocks’ furious ascent in the final weeks of 2023 rested on data suggesting the economy has slowed enough for inflation to ease but not enough to fall into a recession. That “soft landing” scenario would allow the Fed to shift to cutting interest rates.
Friday’s monthly jobs report showed hiring picked up in December, but job gains for previous months were revised downward. Average hourly earnings ticked up more than expected. The mix of data did little to clarify when the Fed might start lowering rates.
Investors will closely watch what corporate leaders say about their outlook for the economy, especially executives at the country’s biggest banks.
“The big question is, can the economy orchestrate a soft landing?” said Stephanie Lang, chief investment officer at Homrich Berg.
Strong consumer spending helped buoy the economy in 2023, even as the Fed pushed up interest rates to the highest levels in more than two decades. The latest data from the holiday shopping season showed an increase in spending to finish the year.
Early quarterly reports from retailers struck more of a wary tone.
Nike and FedEx, which reported their latest quarterly results in December, both lowered their revenue forecasts and warned of weak demand. Conagra Brands, the maker of Healthy Choice frozen meals and Slim Jim meat sticks, also cut its annual guidance in the past week after sales volume slipped. Walgreens Boots Alliance said Thursday it would cut its dividend, sending shares tumbling.
“We are seeing indications of more cautious consumer behavior around the world in an uneven macro environment,” Nike Chief Financial Officer Matthew Friend said in the company’s Dec. 21 earnings conference call.
Earnings results from megacap technology companies in the weeks ahead loom large over the market after a big run-up in their share prices in 2023. The heavy weighting of companies like Apple and Microsoft in the S&P 500 make their results particularly influential in the stock market’s overall direction.
Analysts expect communications-services companies to report the highest year-over-year earnings growth among the S&P 500 sectors at about 42%, with Meta Platforms being the biggest contributor, according to FactSet. They forecast the energy segment to experience the biggest profit decline compared with 2022, when oil prices soared and earnings boomed.
Some investors are focusing on sectors that lagged behind last year, believing those beaten-down areas could bounce back this year. Lang said she is interested in healthcare stocks and views them as attractively priced compared with other segments of the market.
This year, Wall Street expects earnings to grow sharply. Analysts expect profits among companies in the S&P 500 to climb about 12% in 2024, according to FactSet.
But there is some question about whether stocks will rally even if earnings climb. Companies in the S&P 500 are trading around 19.2 times their projected earnings over the next 12 months, compared with the five-year average of 18.9, according to FactSet.
“High valuations basically mean that markets are priced for perfection, and then some more,” said Anna Rathbun, chief investment officer for CBIZ Investment Advisory Services.