The second week of the earnings season is set to kick off with 41 S&P 500 companies scheduled to report, including a heavy dose of bank and financial earnings. With companies like Charles Schwab, Goldman Sachs, and Bank of America on the list, investors are eagerly awaiting their results. Other notable companies such as Johnson & Johnson, Netflix, and Procter & Gamble are also scheduled to release their earnings reports. The S&P 500 slumped by 1.5% last week, while the Magnificent 7 tech stocks managed to gain 1%.
Despite the rise in Treasury yields, economically sensitive cyclical stocks outperformed the less-sensitive staples. Companies remain seemingly unconcerned about the risk of a recession despite the increasing yields. The early reports from the earnings season show that blended earnings have underperformed expectations, with net interest income guidance from banks generally falling short of hopes. The healthcare sector was a significant detractor from S&P 500 earnings growth, with Bristol-Myers Squibb contributing to a decline in estimates for the sector. Sales growth, closely tied to nominal GDP growth, is expected to benefit from solid year-over-year growth in the first quarter.
The biggest story of last week was the higher-than-expected reading for consumer inflation, with March CPI coming in at 3.5% year-over-year. The sharp rise in the supercore CPI reading, which excludes housing inflation, may complicate the Federal Reserve’s narrative on inflation driven by wage growth. However, the Atlanta Fed’s wage tracker has maintained a downward trend, suggesting that inflation may be a temporary issue rather than a long-term setback. Despite concerns about inflation, economic growth continues to support earnings forecasts, with Treasury yields rising and the likelihood of a June Fed rate cut falling to 30%.
Looking ahead, the March retail sales release will be a key indicator of U.S. consumer and economic strength. This week will see more bank earnings reports, which may face challenges due to worries about future lending income and the delayed expectations for the first Fed rate cut of the year. Regional banks, in particular, may be at risk due to additional exposure to the troubled office real estate sector. Management’s future earnings guidance will be closely scrutinized, with expectations that the first quarter will mark the trough earnings growth for the year.
In conclusion, despite the challenges posed by inflation and rising Treasury yields, the earnings season is off to a relatively positive start, with some sectors outperforming expectations. Companies are continuing to navigate economic uncertainties and inflation concerns, with investors closely monitoring the earnings reports for insights into future performance. The upcoming bank earnings reports and economic data releases will provide further clarity on the state of the U.S. economy and investor sentiment moving forward.
