The earnings season started off slow with only 41 S&P 500 companies reporting, mostly from the banking sector. However, the pace is expected to pick up this week with 159 more companies scheduled to report. Despite this, the S&P 500 experienced a 3% slump for the week, bringing it down by 5.4% quarter-to-date. The 10-year Treasury yield rose, causing a decline in the Bloomberg Aggregate Bond index and impacting the Magnificent 7 stocks, which saw an almost 8% decline.
Four of the Magnificent 7 companies, including Tesla, Meta Platforms, Microsoft, and Alphabet, are set to report their earnings this week, with Amazon, Apple, and NVIDIA releasing theirs later in the season. Other notable companies reporting this week include PepsiCo, General Dynamics, Union Pacific, Chevron, and Exxon Mobil. Blended earnings are currently worse than forecasts at the end of the quarter, as better-than-expected results from banks were offset by the healthcare sector for the second week in a row.
Sales growth is closely tied to nominal GDP growth, suggesting that companies could see a tailwind in revenue growth with solid nominal GDP growth expected in the first quarter. However, blended earnings performance so far has underperformed expectations, with the growth rate currently at -0.5% year-over-year, compared to the expected +3.5% at the end of the quarter. The uncertainty about inflation and economic growth has affected Treasury yields and the likelihood of a Fed rate cut in June.
The upcoming first quarter GDP report will be a significant release to assess the strength of the U.S. consumer and economy, with consensus estimates expecting a growth rate of 2.5%. The recent performance of stocks, driven by the narratives of easing inflation and the promise of AI, has faced challenges with inflation surprises leading to market turbulence. The outlook for AI-related stocks remains positive, with the performance of Meta Platforms, Microsoft, and Alphabet crucial to the narrative.
Despite the challenges, the Federal Reserve’s decision to hold off on rate cuts has helped mitigate inflation concerns. The overall earnings growth story remains strong, supported by the outperformance of the U.S. economy. While uncertainty may weigh on stock valuations, actual earnings data and company guidance have the potential to alleviate macroeconomic worries. Investor optimism may be restored as earnings season progresses, potentially providing support for the market.
In conclusion, the current earnings season has seen a mix of better-than-expected results from banks and challenges in the healthcare sector impacting overall blended earnings performance. The stock market has faced turbulence due to inflation concerns, but the promise of AI-related stocks continues to drive optimism. The upcoming GDP report and earnings releases from key companies will provide further insight into the health of the U.S. economy and the stock market.
