This week, the first quarter financial reporting season of the US stock market will slowly kick off. JPMorgan Chase, Wells Fargo Bank, and Citigroup will be the first to release their first quarter financial reports on Friday, and the world's largest asset managers BlackRock, State Street, and Delta Air Lines will also release their results later.
Wall Street expects that despite the impressive performance of US stock prices in the first quarter, the financial performance of US companies will be relatively sluggish.
In addition, Wall Street predicts that the "Big Seven" will continue to lead the profit growth of US stock companies, while the profit performance of the communication and technology industries is expected to be high. In addition, the current cash flow levels of US stock companies are at record highs, which means many companies may announce large-scale buybacks and business expansion.
Wall Street is a bit pessimistic about this financial reporting season
In the first three months of this year, the S&P 500 index has risen by a cumulative 10.16%. However, according to Bloomberg data, Wall Street strategists are not optimistic about the performance of US stock companies in the first quarter: the year-on-year profit growth of S&P 500 index constituent companies in the first quarter is expected to be the lowest since 2019, only 3.9%.
But this situation can also be interpreted as positive: against the backdrop of already pessimistic market expectations, if the performance of US stock companies is impressive, it will actually give the market confidence in further growth - in fact, three months ago, such a scenario had already occurred: the market expected poor performance of US stock companies in the fourth quarter of last year, but the actual financial performance exceeded expectations, driving the market up.
Wendy Soong, senior analyst at BI, said, "As traders expect the Federal Reserve to cut interest rates later this year, this may lead to stronger consumer spending and economic activity, resulting in better profit growth and higher stock prices."
Wall Street has compiled five investment themes worth paying attention to during this financial reporting season:
The "Seven Giants" Leading Profit Growth
In the first three quarters of last year, S&P 500 index constituent stocks experienced three consecutive quarters of profit contraction, and it was not until the fourth quarter of last year that this trend was reversed. Driven by strong economic growth and consumer demand, it is expected that S&P 500 index components will achieve profit growth for the second consecutive quarter, with strong profit growth from large technology companies potentially becoming a key driving force.
Among them, the most noteworthy is naturally the "Big Seven" of the US stock market. According to data compiled by Bloomberg, Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla are expected to see an overall profit growth of 38% in the first quarter of this year. If these companies are excluded, the profits of other components of the S&P 500 index are expected to shrink by 2% year-on-year.
Wall Street expects that this trend will reverse over time. According to data compiled by David Kelly, Chief Global Strategist at JPMorgan Asset Management, the profit growth of the "Big Seven" is expected to decrease to 15% by the fourth quarter of this year, while the profit growth of other components of the S&P 500 index will expand to 18% year-on-year.
Profit growth in communication, technology, and public utilities
Analysts predict that among the 11 industries covered by the S&P 500 index, three industries will see profit growth exceeding 20%, namely telecommunications services, technology, and utilities, while energy, materials, and healthcare companies may see their profits shrink.
Dan Eye, Chief Investment Officer of Fort Pitt Capital Group, stated that contrary to popular belief, historically, moderate inflation in the economy has generally been beneficial for corporate profits as it has promoted growth, lending, and borrowing.
&Amp; Quota; Corporate profits are nominal, so a bit of inflation is not a bad thing for corporate profits; Quota; "Given the significant rise in the stock market, it is clear that the stock market detected this in the first quarter," said Ayer
Cash flow is at a high level
In the first quarter of this year, corporate cash and free cash flow were at record high levels, laying the foundation for the recovery of capital allocation for large US companies, whether through paying dividends to shareholders or expanding their business through investment.
BI data shows that shareholder dividends of S&P 500 index constituent companies rebounded in the fourth quarter of last year. Meanwhile, the scale of stock repurchases has also begun to recover after four consecutive quarters of decline.
BI analysts say that the increase in capital expenditure will depend on the rebound of industries other than the technology industry.
Increase in operating profit margin of enterprises
Traders will closely monitor operating profit margin, which is a key indicator of a company's profitability. Historically, operating profit margin has been a signal of a company's stock price trend.
In the past year, against the backdrop of companies cutting costs and boosting profits, the gap between consumer prices and producer prices in the United States has significantly narrowed. According to BI data, analysts currently estimate a 15% operating profit margin for the first quarter. With improved forecasts for the next few quarters, the worst period for US stock companies may have passed.
The stock price may not follow the financial report
Traders predict that the stock price trend during this financial reporting season may not be completely consistent with the financial performance.
Bloomberg data shows that the expected one month correlation index for S&P 500 index components is hovering around the lowest level since 2018, at only 0.16. When the index reads 1, it means that the stock price trend will be completely synchronized with the financial report performance.