As earnings reporting season kicks off on Wall Street, investors are hopeful for a broader range of companies reporting stronger profits. Last year, Big Tech stocks drove much of the profit growth for corporate America, with just seven companies accounting for all of the U.S. market’s profit expansion. However, as defense contractors and other industrial companies prepare to report their latest results, there is hope that profit growth will extend to a wider range of companies.
General Dynamics is one such company reporting this week, with analysts predicting a nearly 12% increase in earnings per share from a year earlier. This marks a significant acceleration from last year’s first-quarter growth of approximately 1%. The company is expected to benefit from strong demand for its Gulfstream business jets and from European defense agencies. Waste Management is also set to report this week, with analysts forecasting a 15.3% increase in profit growth from 1.6%. The company is said to be benefiting from higher prices for its collection and disposal services.
The robust U.S. economy, despite high interest rates aimed at curbing inflation, is credited with driving the expected strength in revenues for companies. This is expected to translate into improved profits across a broader range of sectors. The broadening out of stock index performance beyond just tech companies is seen as a positive sign for investors. However, companies are facing increased pressure to deliver higher profits, as U.S. stocks reached record highs in March and are now considered expensive. The S&P 500 is currently trading at 20.6 times the expected earnings per share of its companies in the next 12 months, well above the average of 17.8 over the last decade.
With interest rates unlikely to offer a lift anytime soon due to high inflation, the focus remains on corporate profits as a key driver of stock prices. Stubbornly high inflation has dashed hopes for multiple interest rate cuts by the Federal Reserve this year. Despite these challenges, investors are optimistic about the potential for broader profit growth across various sectors, as companies begin to report their latest earnings results. The overall outlook for the stock market hinges on the ability of companies to deliver strong profits in the face of economic headwinds.
