caroline valetkevich
NEW YORK (Reuters) – Earnings at big technology companies are expected to once again drive S&P 500 earnings growth in the next U.S. fiscal year, lifting optimism for stocks after a weak start through April. There is a possibility that it will become stronger.
As the economy remains strong, the Federal Reserve has postponed the scheduled rate cut, and concerns about the outlook for interest rates hang in the air heading into the first quarter earnings season.
Analysts say the S&P 500 overall rose 5% year-on-year in the first quarter, driven by gains in mega-cap tech stocks after fourth-quarter 2023 earnings growth of 10.1% was much better than expected. % growth in profits (LSEG data). .
Earnings for some of the largest U.S. banks unofficially begin the reporting period on Friday. From there, the season kicks into high gear, with results from Netflix, Procter & Gamble, UnitedHealth and Travelers Cos all set to be announced next week.
Profits in the telecommunications services sector, which includes Alphabet and others, are expected to increase by 26.7% from a year ago. The technology sector, which includes Nvidia, Apple and Microsoft, is expected to rise 20.9% in the first quarter, according to LSEG data.
Communications services led revenue growth in the fourth quarter of 2023, up 53.3% year-over-year, while technology revenue grew 24.2%.
Investors remain optimistic about artificial intelligence. The Nasdaq closed at its highest point in more than two years in late February, as the AI craze spurred gains in Nvidia and other tech giants.
“We see a healthy capex cycle moving forward from both AI and other mega-projects… benefiting not only semiconductors but also power and commodities,” BofA Securities strategists said in a research note Thursday.
The S&P 500 has been hitting record highs one after another since late January. It's up about 9% year-to-date, but has fallen about 1% so far in April.
The U.S. Department of Labor reported this week that consumer prices were strong for the third consecutive month. Some investors now feel the Fed may delay its rate cut until September.
Growth stocks tend to be more sensitive to rising interest rates.
“I'd rather have a strong economy than one that needs stimulus from the Federal Reserve,” said Oliver Pursche, senior vice president and advisor at Wealthspire Advisors in Westport, Conn.
But during earnings season, “you're going to hear more and more about consumer debt and the cost of carrying debt. Spending growth is outpacing wage growth, and this is not sustainable.” said.
Among the S&P 500 sectors, energy, materials, and healthcare are expected to have the largest year-over-year profit declines in the first quarter.
But analysts expect the first quarter to be the slowest profit growth this year, with full-year profit growth expected to be 9.8% in 2024, based on LSEG data.
“As demand recovers, operating leverage will further increase margins,'' said a strategist at BofA Securities.
(Reporting by Caroline Valetkevich; Editing by Alden Bentley and David Gregorio)
