The US stock market’s strongest two-year rally since the dot-com bubble is facing its next major test as companies start releasing their quarterly earnings, providing a crucial check on whether valuations have outrun the underlying reality. The S&P 500 Index slid 1.5% on Friday, its worst drop since mid-December, amid speculation that the Federal Reserve won’t cut interest rates again until the second half of the year.
Investors are expecting earnings growth of 7.3% in the fourth quarter from a year earlier, which is the second-highest pre-season forecast in the past three years. This puts equities on shaky footing if the results or outlook for the months ahead fall short. With the S&P 500 priced for roughly 23% earnings-per-share growth in the next 12 months, the estimates embedded in stock prices are unusually high.
Four key companies – JPMorgan Chase & Co., Citigroup Inc., and BlackRock Inc. – will kick off the earnings season on Wednesday, followed by other key companies such as Netflix Inc., Procter & Gamble Co., and 3M Co. Here are five key themes to watch:
1. Broadening Growth: Will earnings growth accelerate beyond the largest tech companies, providing a boost to some of the market’s laggards?
2. Tech Growth: Investors are prepared for the so-called Magnificent Seven companies – Nvidia Corp., Apple Inc., Microsoft Corp., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc., and Tesla Inc. – to report a slowdown in growth.
3. Trade, Tariffs, and Taxes: How will President-elect Donald Trump’s tax-cut, tariff, and deregulatory policies trickle through Corporate America?
4. Profit Revisions: Will earnings-revision momentum, a gauge of upward-to-downward changes to expected per-share earnings, remain negative, indicating shifting sentiment?
5. Monitoring Margins: Will operating margins, which have come down from the post-pandemic surge, continue to ease some cost pressures?
Europe’s earnings season is also expected to be a mixed bag, with profits for the Stoxx 600 projected to have risen just 3% in 2024, compared with 8% for the S&P 500.