Wall Street investors are expecting that a slew of quarterly results from the United States, notably those from mega cap growth companies, will reinforce corporate America’s strong profit projections and support the case for stocks following a difficult start to the year.
U.S. stock investors, concerned that geopolitical instability and the Federal Reserve’s fight against inflation could stifle economic development, are flocking to defensive sectors, which they believe can better weather storms and pay high dividends.
Even though the broader market has slid, the healthcare, utilities, consumer staples, and real estate sectors have all seen gains in April, following a trend that has seen them outperform the S&P 500 this year.
The recent round of earnings comes against a backdrop of Fed hawkishness and a rapid rise in bond yields, raising concerns about whether policymakers will harm the economy in their efforts to combat the worst inflation in nearly four decades. After a violent selloff on Friday, the S&P 500 fell in April and is now down 10.4% for the year.
Bullish investors are banking on a strong corporate outlook to underpin markets as monetary policy weighs on stocks, increasing pressure on firms to post strong bottom-line earnings and predictions. According to Refinitiv IBES, S&P 500 companies are expected to grow earnings by 9% this year.
Investors have wasted no time in punishing shares of businesses with meagre outcomes so far, particularly those with high valuations. Netflix was one of the most recent casualties, with its stock dropping about 35% in a single session after the streaming giant revealed its first loss in members in a decade.
Investors will focus on Apple, Microsoft, Amazon, and Alphabet, which together have a market capitalization of $8 trillion and account for one-fifth of the S&P 500’s weight. The Big Four have all decreased this year, with Apple down approximately 9%, Amazon down 13.4%, Alphabet down 17.4%, and Microsoft down 18.5%.
For the quarter ending in March, earnings projections for these firms are low. According to Refinitiv statistics, Microsoft is estimated to have raised adjusted earnings per share by 12% over the prior year, Apple by 2%, Alphabet by 0.7%, and Amazon by 49%. The S&P 500 is forecast to boost quarterly earnings by 7.3% on average.
Apart from the top four businesses, Meta Platforms, Visa and Mastercard, oil heavyweights Chevron and Exxon Mobil, and consumer corporations Coca-Cola and Pepsico are all expected to report results next week.
Investors will be looking for companies to retain profit margins as inflation threatens to drive up their input costs, in addition to the bottom-line performance and financial outlooks. JPMorgan predicted in a note this week that net income margins for S&P 500 corporations should fall to around 13% in 2022, down from a record 13.4% last year.