Another quarter of modest growth is expected for this earnings season, with earnings and sales both forecasted to increase by 3.5% year-over-year. While inflation has slightly increased, the differential between input costs and pricing is expected to keep profit margins steady. Forward earnings guidance will be crucial as the first quarter is projected to be the slowest earnings growth of the year. Ten S&P 500 companies are set to report earnings this week, with the primary focus being on bank earnings, including JPMorgan Chase, Citigroup, Wells Fargo, and State Street.
According to FactSet, financials are expected to see 1.7% growth in earnings, but banks within the sector are forecasted to post an 18% decline due to weak loan growth and normalizing credit losses. Investment banking and wealth management revenues are expected to benefit from strong markets. The communications services sector is predicted to report the most robust year-over-year earnings growth at 19.4%, with Meta Platforms expected to be a significant contributor. The consumer discretionary sector is also expected to post outsized earnings growth at 16%, largely due to Amazon.com’s influence on the industry.
The materials and energy industries are expected to have the most significant declines in revenues this quarter due to lower natural gas prices. Energy and materials companies are likely to see the largest year-over-year decline in earnings. Despite falling energy prices, Warren Buffett’s Berkshire Hathaway holds significant stakes in Occidental Petroleum and Chevron. Overall, solid economic activity in the first quarter is expected to support revenue growth for the S&P 500 and provide some upside despite challenges in specific sectors.
Inflation has been trending lower, which should help earnings this quarter, as it can threaten unit sales and pressure companies to raise prices. The differential in price growth for producers’ inputs compared to consumer prices suggests that profit margins should remain steady this quarter. With stable margin pressures and solid economic activity supporting topline sales growth, positive year-over-year earnings growth expectations are anticipated.
While the U.S. dollar may have limited impact on multinational companies this quarter, Fed Chair Powell’s rate-cut-friendly comments have raised expectations of a Fed easing in June. The strong job report has tempered optimism, but market odds still favor a June or July start to Federal Reserve’s interest rate cuts. Fed Fund futures are expecting two to three cuts of 25 basis points each in 2024. The low single-digit year-over-year earnings gains for the first quarter are expected to be exceeded, supported by resilient economic growth.
Overall, much attention will be paid to management’s future earnings guidance during this earnings season. In addition to earnings reports, consumer and producer inflation readings will be closely monitored for their impact on the timing of Fed rate cuts. The first quarter is expected to be the trough earnings growth of the year, and with expectations of positive earnings growth driven by solid economic activity, the outlook for the remainder of the year remains cautiously optimistic.
