Nearly 180 companies in the S&P 500, representing about half the market value of the benchmark, are due to report results next week. They include the four largest US companies by market capitalization: Apple, Microsoft, Amazon and Alphabet, Google’s parent company.
The latest set of results comes amid warmongering by the Federal Reserve and a rapid rise in bond yields that has sparked unease about whether policymakers will hurt the economy as they battle against the worst inflation in nearly four decades. The S&P 500 fell in April and was down 10.4% so far this year after a strong sell-off on Friday.
With monetary policy weighing on equities, optimistic investors are counting on a strong corporate outlook to support markets, increasing pressure on companies to report strong earnings and guidance. According to Refinitiv IBES, S&P 500 companies are expected to increase earnings by 9% this year.
“That’s probably the strongest argument you can make for owning stocks at this point, that corporate earnings are still very strong,” said Charlie Ryan, portfolio manager at Evercore Wealth Management. “Any deterioration in corporate earnings growth and the pace of that growth would spook the market.”
So far, investors have been quick to punish the stocks of companies with disappointing results, especially those with high valuations. A recent victim was Netflix, whose shares fell around 35% in a single session after the streaming giant reported its first drop in subscribers in a decade.
Although stocks have fallen since the start of the year, the S&P 500 is still trading at about 19 times forward earnings estimates, above its long-term average of 15.5 times.
“We are in a show-me type environment. I think the next week will be critical for tech and high-growth stocks, especially high-value stocks,” said Anthony Saglimbene, global market strategist at Ameriprise. “They better prove they deserve those multiples right now.”
Investors will focus on earnings from Apple, Microsoft, Amazon and Alphabet, which together have a market value of around $8 trillion and represent one-fifth the weight of the S&P 500. All of these megacap stocks have shrunk this year, with Apple down around 9%, Amazon down 13.4%, Alphabet down 17.4% and Microsoft down 18.5%.
Earnings expectations for these companies are subdued for the quarter ended in March. Microsoft is expected to have increased its adjusted earnings per share by 12% over the prior year period, Apple by 2%, while Alphabet is expected to show a decline of 0.7% and Amazon a decline of 49%, according to Refinitiv data. Overall, S&P 500 companies are expected to increase quarterly earnings by 7.3%.
“Expectations are low, but that doesn’t mean it’s not important,” said James Ragan, director of wealth management research at DA Davidson. “If we’re going to achieve that 9% (earnings growth) for the year or even better than that, it’s hard to imagine we’re going to do that without having better-than-expected earnings from megacap companies.”
In addition to the top four companies, results are expected next week for a range of companies, including Facebook owner Meta Platforms, payments companies Visa and Mastercard, oil majors Chevron and Exxon Mobil and consumer companies Coca- Cola and Pepsico.
Beyond the bottom line and financial outlook, investors will also be looking to see if companies can maintain profit margins as inflation threatens to drive up their production costs. S&P 500 companies are expected to see their net profit margins fall to around 13% in 2022, from a record 13.4% last year, JPMorgan said in a note this week.
Of the 99 S&P 500 companies that have released reports so far, 77.8% reported earnings above analysts’ expectations, Refinitiv IBES said. This rate is higher than the typical beat rate of 66% for a quarter since 1994, but lower than the rate of 83% for the past four quarters.
“The stock market … is waiting for this barrage of profits,” Saglimbene said. The market is “beholden to what companies are saying about the second quarter and beyond.”