This week, companies who account for more than 40% of the gauge’s market value will disclose their results. The “Magnificent Seven” megacaps face high stakes, with earnings expected to increase by over 40% from a year earlier, according to Bloomberg Intelligence. The emphasis on profitability follows a sell-off fuelled by geopolitical concerns and signs that the Federal Reserve will not decrease interest rates soon.
“Beating consensus earnings estimates will not be enough,” said Matt Maley of Miller Tabak + Co. “We’re going to have to see much better guidance from Corporate America if the stock market is going to resume its advance.”
Strategists at Wall Street’s major banks disagree on whether corporations can meet aggressive projections. While Morgan Stanley’s Michael Wilson expects profit growth to rise as the economy recovers, his JPMorgan Chase & Co. colleague, Mislav Matejka, believes that rising inflation, a stronger currency, and geopolitical concerns are clouding the outlook.
Nearly two-thirds of 409 respondents to Bloomberg’s Markets Live Pulse survey anticipate earnings to lift the US stock benchmark. That is the greatest level of confidence in earnings since the survey began asking the issue in October 2022.
The S&P 500 surpassed 5,000, ending a six-day slide. The Nasdaq 100 climbed 1%, with Nvidia Corp. leading the way in big tech. Apple Inc. was declared a top selection for 2024 by Bank of America Corp., citing optimism about its impending performance.
Treasuries dipped ahead of a spate of bond auctions that would put investors’ appetites to the test after rates reached their highest level in 2024.
Hedge funds are returning to purchasing global equities, ignoring broader market volatility to purchase tech companies at the strongest rate in two months, according to Goldman Sachs Group Inc.’s trading desk.
Last week, new long positions surpassed short sales, and single equities witnessed “the largest notional buying in over a year,” the traders wrote in a note, signalling a bullish shift in attitude after hedge funds had been selling for the previous three weeks.
According to the BlackRock Investment Institute’s weekly report, US earnings announcements this week will be critical in determining if risk appetite will remain buoyant in a higher-for-longer rate environment.
“We’re overweight US stocks and see the AI theme broadening,” the Bank for International Settlements said.
According to Megan Horneman of Verdence Capital Advisors, the difficulty for S&P 500 returns this earnings season will be for firms to provide results and outlooks that sustain the already elevated multiples.
According to JPMorgan’s Marko Kolanovic, while price movement may be driven by earnings and may stabilise in the immediate term, the market selloff is likely to continue.
“We remain concerned about continued complacency in equity valuations, inflation staying too hot, further Fed repricing, and a profit outlook where the implied acceleration this year might end up too optimistic,” he said.
“Concerns about rising interest rates, stubborn inflation, and geopolitical risks aren’t going away — but this week, the tech sector may be ‘calling the shots,'” said Chris Larkin of E*Trade from Morgan Stanley.
Indeed, the stakes are high for America’s technological behemoths to begin delivering on artificial intelligence promises, with profitability expected to slow, according to Bank of America Corp. strategists.
This week, Microsoft Corp., Alphabet Inc., Meta Platforms Inc., and Tesla Inc. all report profits, kicking off the so-called Magnificent Seven. With AI considered as the key to future profitability, traders are focusing on its contributions to the earnings mix, according to a BofA team led by Ohsung Kwon and Savita Subramanian.
According to UBS Group AG’s Jonathan Golub, big IT businesses are losing speed as the sector’s earnings growth slows.
According to the team lead by Scott Chronert, their research predicts that first-quarter earnings would surpass bottom-up consensus by 76%. However, the chance of profits growth drops to 49% for the rest of 2024, suggesting that companies may be hesitant to boost forecast.
This week is important for markets, with huge tech results and Friday’s significant inflation data having the ability to change the market’s near-term direction, according to Jeremy Straub of Coastal Wealth.
“If big tech earnings and Friday’s inflation data disappoint, that could extend the duration and depth of this current stock market correction,” he said. “While it’s possible the stock market has further room to decline, we remain constructive on stocks for 2024.”
In recent weeks, US equities have been shaken by tempered expectations for Fed interest rate decreases. However, history suggests that there may be little to fear: if the past is any indicator, equities markets are likely to do well in an age of rising interest rates over extended periods of time.
According to BMO Capital Markets statistics dating back to 1990, the S&P 500 had an average price return of 13.9% during previous periods of high bond yields, compared to an average gain of 6.5% when rates were decreasing.
“We believe stronger-than-expected growth trends in the US recently should be a positive for the economy and corporate profits, at least through the first half of this year,” said Anthony Saglimbene, chief economist at Ameriprise. “However, the price paid for that firm fundamental backdrop likely leaves inflation elevated and interest rates higher for longer than most expected at the start of the year.”