Source: Finance Association
① With 90% of US stock companies already announcing first-quarter earnings reports, the profit growth rate of S&P 500 companies in the first quarter is expected to reach 7.1%, far exceeding analysts' pre-season forecasts of 3.8%. ② Wall Street analysts are raising earnings estimates for the second quarter at the fastest rate in two years. This means that the market's confidence in the profit prospects of US companies is growing, and this is clearly a positive sign for US stocks.
As the Q1 earnings season for US stocks comes to an end, Wall Street analysts are raising earnings expectations for the second quarter at the fastest pace in two years. This means that the market's confidence in the profit prospects of US companies is growing, and this is clearly a positive sign for US stocks.
Most of the Q1 results of US stocks were better than expected
According to the data, up to now, 459 S&P 500 stock companies have announced their financial reports for this quarter. According to statistics released so far, the profit growth rate of S&P 500 companies in the first quarter is expected to reach 7.1%, far exceeding the 3.8% forecast by analysts before the quarter.
According to data compiled by Bloomberg, 79% of companies in the S&P 500 index had first-quarter profits that exceeded expectations, compared to 76% in the previous quarter.
Wall Street also raised earnings expectations for the second quarter (ending June) significantly as most financial reports performed better than expected.
At the end of 2022 and the first half of 2023, US stocks experienced a three-quarter decline in profit growth. However, with the recovery of the US economy and consumer demand, the profit growth rate of US stock companies has rebounded for two consecutive quarters since the third quarter of last year, and the current trend will be the third consecutive quarter of a rebound.
BI data shows that two key areas closely linked to the economic cycle — energy and raw materials companies — have led to an increase in profits for listed companies.
It will obviously benefit US stocks
BI senior analyst Wendy Soong said, “This is a good sign for the direction of the US stock market this year because it shows that more analysts are raising the company's expectations after realising that previous predictions may be too pessimistic, which helps support operating margins.
BI data shows that one closely watched indicator — profit correction momentum — has reached its highest level since September last year. The indicator measures changes in expected earnings per share over the next 12 months. A senior BI analyst said that this indicates that in the next few weeks, analysts may further raise profit expectations.
Although many Federal Reserve officials have recently hinted that they intend to keep interest rates high for a longer period of time, US stocks are still approaching historic highs. This is an encouraging prospect.
Thomas Martin, senior portfolio manager at Global Investments, said: “This is definitely a positive sign because I want to invest in companies whose earnings are expected to increase, because these stocks have good profit prospects.” The company is taking stock positions in industrial companies linked to the data center infrastructure business.
Does Wall Street value guidance more than performance?
However, it is worth noting that although Wall Street analysts have raised their earnings forecasts for the second quarter, their earnings expectations for the full year 2024 have hardly changed. According to data compiled by Bloomberg, Wall Street expects the earnings per share of S&P 500 companies until 2024 to be little different from the forecast a year ago.
BI analysts say this may be because most companies have not published longer-term financial guidance for the future. Analysts are reluctant to revise their expectations for the second half of this year until more companies release profit guidance for the next few quarters.
Up to now, about 25% of companies in the S&P 500 index have provided quarterly results guidance. Of these, about 80 companies have only announced earnings per share estimates for the second quarter, but not revenue prospects.
Historically, the stock market has responded more to performance guidance than to performance itself, and traders generally don't favor companies whose performance guidance falls short of expectations — this is even more evident this earnings season.
BI data shows that in the current reporting period, if a company's guidelines indicate that its earnings and revenue per share will decline, then the company's stock performance on the day after the results are released will lag nearly 7% behind the S&P 500 index, the worst performance since the beginning of 2020.
Looking ahead, America's largest retailers — Home Depot, Walmart, Target, etc. will release financial reports this week to provide investors with key insights into consumer strength, economic growth trajectory, and corporate profitability. In addition, Nvidia, the leader in the artificial intelligence boom, will also announce financial results next Wednesday (May 22).
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