U.S. earnings seasons begins: What to expect

The American earnings season kicked off last Friday (12), with the release of financial indicators from major financial institutions such as JPMorgan Chase & Co (NYSE:JPM), Wells Fargo & Company (NYSE:WFC), Citigroup Inc (NYSE:C), and BlackRock (NYSE:BLK). In the week of April 15 to 19, other prominent names will report data, including Bank of America Corp (NYSE:BAC), Morgan Stanley (NYSE:MS), United Airlines Holdings Inc (NASDAQ:UAL), Netflix (NASDAQ:NFLX), and Procter & Gamble Company (NYSE:PG).

"The banks kicked off the earnings season on Friday morning, presenting a mixed outlook. Despite average earnings per share (EPS) growth exceeding expectations so far, the expectation that interest rates would be maintained at around 5.5% at least until June led to a repricing of future earnings, amid expectations of lower profits in the investment banking segment," says Thomas Monteiro, chief strategist at Investing.com.

Monteiro asserts that investors should pay attention not only to the reported numbers now but, primarily, to the so-called future guidance. "In environments like this, it is not uncommon to see companies beating expectations on all bottom-lines but falling due to negative guidance."

Monteiro believes the season should be reasonable on average for companies listed on Wall Street but "certainly far from the average double-digit profit growth as reported in the last quarter," indicating something close to 5% compared to the previous year for S&P 500 companies. Among the reasons cited are a strong comparison base and difficulties in sectors such as construction and energy, which are expected to see deeper declines, in his view.

Technology and communications are expected to show higher profit growth, amid the boom in artificial intelligence (AI) and increasing M&A activity, but the strategist considers that there will be more scrutiny on AI-related profits given the robust investments made.

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Among the factors that weighed on the last earnings season and deserve extra attention in this one, according to Monteiro, are the lack of growth in the advertising market and the flattening of the electric vehicle demand growth curve.

"In the former, it is likely that persistently high interest rates will force large companies like Google (NASDAQ:GOOGL) and Amazon (NASDAQ::AMZN) to seek even more diversification in their product portfolios. In the latter, we run the risk of seeing the innovation race in the segment pushed even further away due to a general flattening of margins," concludes the expert.

According to Bank of America (BofA), investors' focus now shifts to profits, amid a macroeconomic scenario considered mixed but with more positive trends compared to the fourth quarter, and low expectations. The bank's strategists estimate a 4% earnings beat.

The focus will be on demand, with possible profit increases possibly driven by higher volumes, according to BofA, along with operational leverage.

"We believe the next stage of the profit upswing will be led by volume. Operational leverage should further boost margins as demand recovers," mentioning sectors such as energy, discretionary consumption, industrials, technology, and materials as possible beneficiaries.

"Although the service economy is showing signs of weakness (e.g., restaurants), the normalization of spending on goods versus services is a healthy setup for profits," they add.

Analysts at Bank of America see a healthy investment cycle ahead for both AI and other megaprojects, as well as improvement in dividend expansion this season, mentioning the initiation of dividends by technology companies.

Renewed Momentum?

Following market pressures triggered by higher-than-expected inflation data in the United States and a series of revisions from financial institutions regarding the onset of interest rate cuts by the Federal Reserve (Fed, the Central Bank of the United States), investors are in search of new catalysts.

Goldman Sachs anticipates that corporate earnings, supported by robust American economic growth, will be the main driver for stocks. GS assesses that companies with higher operational leverage are likely to experience faster profit expansion, given potential increases in their profit margins.

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