Wall Street Is Sending a Bullish Signal for S&P 500 Earnings

(Bloomberg) — Analysts are ratcheting up earnings forecasts for the current quarter at the swiftest pace in two years, suggesting that the worst of Corporate America’s profit slump may be firmly in the rear-view mirror.

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With nearly 90% of S&P 500 Index companies having reported for this earnings season, upbeat first-quarter results have pushed Wall Street to boost profit projections for the three months through June, Bloomberg Intelligence data show.

A resilient economy and robust consumer demand are poised to support earnings growth for a third straight quarter, following three quarters of profit contraction. Two key groups with strong links to the economic cycle — energy and materials companies — have led the upward adjustments for profits, according to BI data.

“This is a good sign for the direction of US stocks this year because it signals that more analysts are revising company estimates higher after realizing prior forecasts might be too pessimistic, helping to support operating margins,” said Wendy Soong, senior analyst at BI.

The benchmark gauge for American equities is on track to post 7.1% earnings growth for the January-March period, topping analysts’ preseason estimates of 3.8%.

A closely watched indicator known as earnings-revision momentum — a gauge of upward-to-downward changes to expected per-share earnings over the next 12 months — has reached its highest level since September, BI data show. This indicates that more hikes to analysts’ forecasts are likely coming in the weeks ahead, according to BI’s Soong.

It’s an encouraging prospect for a market that is brushing up against record highs even as the Federal Reserve signals it intends to keep interest rates higher for longer.

“This definitely is a positive sign because I want to invest in companies where estimates are going up since those stocks have favorable profit outlooks,” said Thomas Martin, senior portfolio manager at Globalt Investments, whose firm is snapping up shares of industrial companies that are tied to data-center infrastructure businesses.

That said, the economic backdrop has shown some cracks of late, a potentially worrisome development for the profit outlook. US employers scaled back hiring in April and the unemployment rate unexpectedly rose.

Of note, analysts’ earnings outlook for all of 2024 has barely budged even as they’ve raised second-quarter estimates. Wall Street sees companies in the S&P 500 earning around $245 per share in 2024, little changed from the projection a year ago, according to data compiled by Bloomberg Intelligence.

The upshot is that analysts are hesitant to revise their outlooks for the second half of the year until more companies deliver profit guidance in the coming quarters, according to Soong. Roughly 25% of S&P 500 companies provide quarterly guidance. Some 80 have reported second-quarter EPS guidance, with revenue outlooks stagnating.

Historically, stocks react more to guidance than to results, and traders have punished companies that delivered weaker-than-expected forecasts.

For the current reporting period, the median stock has underperformed the S&P 500 by nearly 7% within a day of its results if the firm guided lower on EPS and sales — the worst showing going back to early 2020, BI data show.

From Home Depot Inc. to Walmart Inc., the biggest US retailers are about to grab the earnings spotlight next week, providing investors crucial insight into consumer strength, the trajectory of economic growth and corporate profitability. Target Corp. and Lowe’s Cos. report the following week, along with artificial-intelligence darling Nvidia Corp. — the last of the so-called Magnificent Seven companies to report — on May 22.

“The trajectory for profits from here looks quite strong, though there’s growing consternation over whether consumers are starting to get stretched,” said Scott Ladner, chief investment officer at Horizon Investments, who is underweight consumer-staples shares. “I want to see if middle-income shoppers are changing their spending patterns since revenue growth hasn’t kept up pace with profit outlooks.”

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