Interest rate outlook worries hang over the first-quarter earnings season, with the expected timeline for Federal Reserve rate cuts being pushed back as the economy remains robust.
Analysts expect S&P 500 companies in aggregate to report earnings increased 5% in the first quarter from a year earlier, according to LSEG data, after much stronger-than-expected earnings growth of 10.1% in the fourth quarter 2023 led by gains in megacap tech.
Earnings from some big U.S. banks unofficially start the reporting period on Friday. From there, the season shifts into high gear, with results from Netflix, Procter & Gamble, UnitedHealth and Travelers Cos all due next week.
Earnings for the communication services sector, which includes such names as Alphabet, are forecast to have risen 26.7% from a year ago. The technology sector , which includes Nvidia, Apple and Microsoft, is expected to have climbed 20.9% in the first quarter, according to LSEG data.
Communication services led earnings gains in the fourth quarter of 2023, with 53.3% year-over-year growth, while technology earnings grew 24.2%. Investors remain optimistic about artificial intelligence. The Nasdaq in late February reached a record high close for the first time in over two years, as AI fever has driven rallies in Nvidia and other tech heavyweights. “We see a healthy capex cycle ahead from both AI and other mega projects… benefiting not just semis, but also power and commodities,” BofA Securities strategists wrote in a research note Thursday.
The S&P 500 has hit a string of record highs since late January. It is up roughly 9% year to date, but down about 1% so far for April.
The U.S. Labor Department this week reported the third straight month of strong consumer price readings. Some investors now feel the Fed might delay cutting rates until September.
Growth stocks tend to be more sensitive to higher interest rates.
“I would rather have a strong economy than one that requires stimulus from the Federal Reserve,” said Oliver Pursche, senior vice president and advisor for Wealthspire Advisors in Westport, Connecticut.
But, during earnings season, he said, “we’re gong to start hearing more and more about consumer debt and carrying costs of debts. Spending growth is outpacing wage growth, and that’s not sustainable.”
Of the S&P 500 sectors, energy, materials and healthcare are expected to have had the biggest declines in earnings year-over-year in the first quarter.
But analysts expect the first quarter to be the smallest increase this year for earnings, with profit growth for all of 2024 seen at 9.8%, based on LSEG data.
“Operating leverage should drive margins further as demand recovers,” BofA Securities strategists noted.
