Financial Services Association, April 8 (Editor Liu Rui) This week, the first quarter earnings season for US stocks will slowly kick off. J.P. Morgan Chase, Wells Fargo, and Citibank will be the first to announce first-quarter earnings reports on Friday. The world's largest asset managers BlackRock, State Street Bank, and Delta Air Lines will also announce results later.

Wall Street predicts that despite the impressive performance of US stock prices in the first quarter, the earnings season performance of US companies will be relatively sluggish.

Furthermore, Wall Street expects that the “Big Seven” will continue to lead the profit growth of US stock companies, while the profit performance of the communications and technology industries is expected to be high. Furthermore, the current cash flow level of US stock companies is at a record high, which means that many companies may announce large-scale repurchases and business expansion.

Wall Street is a bit pessimistic about this earnings season

In the first three months of this year, the S&P 500 index had a cumulative increase of 10.16%. However, according to Bloomberg statistics, Wall Street strategists are not optimistic about the performance of US stock companies in the first quarter: the year-on-year profit increase of S&P 500 companies in the first quarter is expected to be the lowest since 2019, at only 3.9%.

However, this situation can also be interpreted as positive in reverse: in a context where the market already has pessimistic expectations, if the performance of US stock companies is impressive, it will give the market confidence to grow further — in fact, this scenario was already happening three months ago: at the time, the market anticipated poor performance of US stocks in the fourth quarter of last year, but the actual earnings performance far exceeded expectations, thus driving up the market.

BI senior analyst Wendy Soong said, “As traders expect the Federal Reserve to cut interest rates later this year, this may lead to stronger consumer spending and economic activity, which in turn will lead to better profit growth and higher share prices.”

Wall Street has compiled the top five investment themes worth watching in this earnings season:

“Big Seven” leads profit growth

In the first three quarters of last year, S&P 500 constituent stocks experienced three consecutive quarters of profit contraction, and this trend was not reversed until the fourth quarter of last year. Driven by strong economic growth and consumer demand, S&P 500 constituent stocks are expected to achieve profit growth for the second consecutive quarter, while strong profit growth from large technology companies may be a key driver.

Of these, of course, the most noteworthy are the “Big Seven” US stocks. According to data compiled by Bloomberg, the overall profits of Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla are expected to increase 38% in the first quarter of this year. If these companies are excluded, the profits of the other components of the S&P 500 index are expected to shrink by 2% year over year.

Wall Street expects this trend to reverse over time. According to data compiled by David Kelly (David Kelly), chief global strategist at J.P. Morgan Asset Management, the profit increase of the “Big Seven” is expected to fall to 15% by the fourth quarter of this year, while the profit increase of other S&P 500 companies will increase to 18% year over year.

Communications, technology and utilities profits will grow

Analysts expect profits from three of the 11 industries covered by the S&P 500 index will increase by more than 20%, namely communications services, technology, and utilities, while profits of energy, materials, and healthcare companies may shrink.

Fort Pitt Capital Group Chief Investment Officer (Dan Eye) said that contrary to popular belief, historically, a moderately inflated economy is generally beneficial to corporate profits because it has boosted growth, loans, and borrowing.

“Corporate profits are nominal, so for corporate profits, a little bit of inflation is not a bad thing,” Ayer said. “Given the sharp rise in the stock market, the stock market clearly sniffed out this in the first quarter.”

Cash flow is high

Corporate cash and free cash flow were at record highs in the first quarter of this year, laying the foundation for a recovery in the capital allocation of large US companies, whether through payment of dividends to shareholders or expansion of business through investment.

According to BI data, shareholder dividends of the S&P 500 index constituent companies rebounded in the fourth quarter of last year. Meanwhile, the share buyback scale has begun to recover after four consecutive quarters of decline.

BI analysts said that the increase in capital spending will depend on a rebound in industries other than the tech industry.

Increase in corporate operating profit margins

Traders will pay close attention to operating profit margin, which is a key measure of a company's profitability. Historically, operating profit margin is a sign of a company's stock price trend.

Over the past year, the gap between consumer prices and producer prices in the US has narrowed drastically against the backdrop of companies cutting costs and boosting profits. According to BI data, analysts currently expect the operating profit margin for the first quarter to be 15%. As predictions for the next few quarters also improve, the period of worst profit for US stock companies may be over.

The stock price may not follow the earnings report

Traders expect that the stock price trend in this earnings season may not be completely consistent with earnings performance.

According to Bloomberg data, the expected one-month correlation index for S&P 500 constituent stocks hovered near the lowest level since 2018, at only 0.16. However, when the index reads 1, it means that the stock price trend will be completely synchronized with the financial results.

Editor/Somer