The earnings season is in full swing, with 159 S&P 500 companies reporting last week and 175 more scheduled to report in the busiest week yet. After a slow start with bank and healthcare earnings, expectations are high for a strong quarter thanks to a more diversified mix of companies. The S&P 500 rose 2.7% last week, bringing the year-to-date gain to 7.4%. The Magnificent 7, which includes Microsoft, Meta Platforms, Amazon, Apple, NVIDIA, Alphabet, and Tesla, soared by almost 6%.
This week features earnings reports from notable companies such as McDonald’s, Starbucks, Coca-Cola, Amazon, Eli Lilly, Apple, and Berkshire Hathaway. As the reporting season reaches the halfway point, blended earnings have matched forecasts at the end of the quarter. The communication services sector led the improvement in earnings, with strong performances from Meta Platforms and Alphabet. Other sectors, including industrial, technology, and consumer discretionary, also played a role in boosting first-quarter earnings estimates.
Sales growth is closely tied to nominal GDP growth, which combines real economic growth with inflation. With solid year-over-year nominal GDP growth expected for the first quarter, companies should see a tailwind in revenue growth. While the blended earnings performance has underperformed expectations so far, sales growth has been better than expected heading into the earnings season. The GDP report for the first quarter showed strong domestic demand, but inflation remains a concern as the core PCE accelerated to 3.7% quarter-over-quarter annually.
Inflation concerns and continued economic growth have pushed the odds of a June Fed rate cut to less than 15%. The probability of rate cuts starting in July is now at one in three, with fewer expected in 2024. Despite these challenges, the resilient economic growth and promising earnings reports from companies like Microsoft and Alphabet suggest a positive outlook. The Fed’s comments on rate cuts will be closely watched, and Berkshire Hathaway’s annual meeting on Saturday will provide insight from Warren Buffett.
Financial markets are bracing for a busy week ahead, with earnings reports from Apple and Amazon.com, the Fed meeting, and the monthly payrolls report all on the horizon. As investors continue to monitor inflation and rate cut expectations, the outlook for stocks remains uncertain. However, the solid economic growth and promising earnings reports from tech giants suggest that the profit rebound story is still intact. The focus will be on Chair Powell’s comments regarding the timing of rate cuts, as well as Buffett’s insights at the Berkshire Hathaway annual meeting.
