Source: Wall Street News

Two-thirds of the earnings season has passed, and the reasons for the divergence in the trend of US stocks this year have gradually surfaced.

Among all US stock companies that have announced fourth-quarter earnings, the performance of large companies is better than Wall Street's expectations, but the performance of small companies is unsatisfactory.

According to Bloomberg, as of Friday afternoon local time, about 80% of the companies included in the S&P 500 index had surpassed expectations in the fourth quarter, easily exceeding the 10-year average of 74%. Among them, the energy, information technology, and consumer goods industries performed the best.

Furthermore, in the Russell 2000 Index, which is the benchmark for small-cap stocks, the proportion of constituent stocks that lost money in the fourth quarter was close to 38%, the highest level since 2019. Currently, about 30% of the index's constituent companies have published financial reports.

Notably, Russell outperformed the S&P 500 index in January, setting a record high since March 2020. This all shows that while large US companies are making a lot of money, small and medium-sized enterprises are facing greater difficulties.

In response, Drew Pettit, Citigroup's US equity strategy director, said, “We still have to wait a quarter for profit growth in the large stock cycle sector and small to medium stocks to correct. Currently, it is still a profitable market dominated by large stocks.”

Wall Street's pessimistic expectations were shattered, and the “Big Seven” supported the US stock market

In response to optimistic earnings reports from large companies, Wall Street raised overall performance expectations. According to media data, Wall Street currently expects an average fourth-quarter profit increase of 6.5% over the same period of the previous year. This will be the best level since mid-2022, higher than the 1.2% forecast at the beginning of the month.

David Wagner, portfolio manager at Aptus Capital Advisors LLC, said: “People are still amazed by the income gap, consumer gap, their spending tendencies, and the prospects and actual results of artificial intelligence.” “It's been a strong earnings season” so far.

It is worth noting that due to the continued decline in profits in the last few quarters, Wall Street was not optimistic about the profit expectations of S&P 500 companies in the fourth quarter, and the forecasts were conservative.

However, judging from the financial reports released so far, the actual performance of large enterprises is better than expected. It seems that they are continuing to grow on the basis of profit growth in the previous quarter, ending the decline in profit in the previous three quarters.

This is a positive sign for pessimistic Wall Street.

More importantly, Wall Street is likely to become more optimistic as expectations of a “soft landing” for the US economy continue to heat up.

Kim Forrest, chief investment officer at Bokeh Capital Partners LLC, said: “If we weed out the huge winners and losers — I think everyone was surprised by the strong results of Amazon and Meta — the rest of the companies performed well this earnings season.” “I know this sounds tepid, but I'll accept it because this time last year everyone was beating the recession drum, and this doesn't seem like where we are now.”

Wall Street News mentioned in a previous article that there are only two types of stocks in the current US stock market. One is large technology stocks, and the other is all other stocks. Under the wave of artificial intelligence investment, so-called “Big Seven” stocks have been rising steadily over the past year, supporting the rise in the US stock market.

Last week, five of the “Big Seven Tech Companies” announced financial reports — Alphabet, Microsoft, Apple, Amazon, and Meta (market capitalization accounts for nearly 25% of the S&P 500 index). “Exceeding market expectations” became a common feature of the financial reports of these five technology stocks:

Meta handed over the strongest financial report in the company's history. The fourth quarter results and first-quarter guidance both surpassed Wall Street expectations, and announced an increase of 50 billion US dollars in stock repurchases and the first dividend in history.

Amazon's cost reduction paid off. The company's net sales for the fourth quarter were better than expected, and the first-quarter results guidance was also generally better than expected.

Apple lived up to expectations and provided a fourth quarter report card that exceeded expectations. EPS hit a record high, and sales volume with iPhone both exceeded market expectations. Service revenue reached record highs for four consecutive quarters, but revenue from Greater China, the third-largest market, fell by about 13% year over year.

Google's parent company Alphabet's fourth quarter revenue and profit both exceeded expectations, and cloud computing achieved full-year profits for the first time.

Microsoft achieved the best quarterly revenue growth rate in the past two years in the fourth quarter, and reached new revenue highs for five consecutive quarters. It exceeded market expectations in terms of EPS earnings per share and cloud business revenue growth.

Nvidia's fourth quarter earnings are scheduled to be released after the market on February 21, after the Spring Festival. Analysts are optimistic that Nvidia's profit will once again exceed expectations this quarter. Thanks to a surge in chip demand, Nvidia's adjusted profit increase will reach 400%.

Editor/Corrine