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US Companies Face Big Test as Earnings Season Looms
As the stock market continues to rally, US companies are preparing to report their quarterly earnings, and analysts are warning that the bar has been set high for a strong performance. With the S&P 500 index climbing about 16% in 2024, investors are expecting a significant increase in profits to justify the recent gains.
A Challenging Earnings Season Ahead
According to analysts’ forecasts compiled by FactSet, US companies are expected to report year-on-year earnings growth of almost 9% in the three months to June, the biggest quarterly increase since early 2022. However, this growth is largely expected to come from a handful of massive technology companies, leaving room for disappointment if earnings fail to live up to expectations.
Setting the Bar High
As Liz Ann Sonders, chief investment strategist at Charles Schwab, notes, "We need earnings to catch up to where valuations are. I’m not suggesting that this will be an ‘uh-oh’ quarter where you don’t meet those expectations, but clearly the bar has been set fairly high."
A Record High Valuation
The S&P 500 index has reached a record high valuation, with its price-to-earnings multiple standing at just over 21 times expected earnings, its highest level since late 2021. This means that investors are willing to pay a premium for stocks, and companies will need to deliver strong earnings to justify these high valuations.
The Tech Rally
The tech rally has been the driving force behind the market’s gains, with five giant companies – Nvidia, Apple, Microsoft, Amazon, and Meta – accounting for a significant portion of the index’s growth. However, their profit growth is expected to slow, and analysts are looking to other sectors for a pick-up in earnings.
Earnings Expectations
Analysts typically cut their forecasts for corporate earnings as results season approaches, but this quarter it has not happened to the same extent. Numbers have been trimmed by just 0.5%, compared with an average of 3.4% over the past five years.
Conclusion
In conclusion, the upcoming earnings season is expected to be a challenging one for US companies, with the bar set high for a strong performance. While technology companies are expected to drive growth, their profit growth is expected to slow, and analysts are looking to other sectors for a pick-up in earnings. With valuations at record highs, companies will need to deliver strong earnings to justify these high prices.
FAQs
Q: What is the expected year-on-year earnings growth for US companies in the three months to June?
A: Almost 9%
Q: What is the expected price-to-earnings multiple for the S&P 500 index?
A: Just over 21 times expected earnings
Q: Which five giant companies are driving the tech rally?
A: Nvidia, Apple, Microsoft, Amazon, and Meta
Q: What is the expected profit growth for these five giant companies?
A: 30% year on year in the three months to June
Q: What is the expected impact of earnings misses on growth stocks with higher valuations?
A: Historically, growth stocks with higher valuations have underperformed the market by 32 percentage points when missing forecasts.
Author: www.ft.com
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