4 Big Earnings Reports Will Drive ETFs This Week
The first-quarter earnings season revs up this week, giving investors an opportunity to price stocks based on something other than macroeconomic variables like inflation and interest rates.
This week, earnings reports are due from several titans, whose impact on the stock market could be significant. Investors will see reports from Tesla Inc. on Tuesday, Meta Platforms Inc. on Wednesday, and Microsoft Corp. and Alphabet Inc. on Thursday.
Those four stocks alone compose around 15% of the SPDR S&P 500 ETF Trust (SPY) and other funds that track the S&P 500.
Alphabet and Meta’s quarterly results will be scrutinized by investors to gauge the state of the digital advertising market, and to see how the firms’ investments in A.I. are panning out.
Microsoft’s report will offer key insights on the status of the enterprise software market and whether A.I. is boosting revenues for the world’s most valuable company by market cap.
Meanwhile, Tesla will give investors clues about the extent of the slowdown in the electric vehicle market and how aggressively the company plans to pursue the development of autonomous vehicles.
Earnings Growth Slowing
Along with the four behemoths, around 30% of S&P 500 companies will report earnings this week.
So far, 14% of S&P 500 companies have already reported earnings, according to FactSet, and of those, 74% have reported earnings above analyst estimates. That’s less than the five-year average beat rate of 77%, but in line with the 10-year average beat rate.
At the same time, the rate of growth in earnings in Q1 compared with the same period a year ago is tracking at 0.5%—the third-straight quarter of year-over-year increases.
However, the headline growth masks a big divergence between companies within the S&P 500.
According to FactSet, just five companies—Nvidia, Amazon, Meta, Alphabet and Microsoft—are responsible for all that growth and more.
Earnings for those five are expected to grow 64.3% year-over-year in the first quarter, while earnings for the other 495 stocks in the S&P 500 are anticipated to drop 6%.
While the market’s dependence on just a handful of stocks to power earnings higher isn’t ideal, if analysts are right, earnings growth could broaden out later this year.
For instance, in Q4, the aforementioned five stocks are expected to see 19.8% year-over-year growth in profits, while the other 495 could see 17.3% growth.
Earnings/Price Relationship
Earnings are the lifeblood of the equity market. Long term, the ultimate driver of share prices is profit.
However, in the short term, that relationship doesn’t always hold. Multiples—the amount investors are willing to pay for a given amount of earnings—can go up and down significantly for all sorts of reasons, and their movement often overwhelms any change in profits.
This year, energy is the best-performing sector in the stock market, with a 15% gain for the Energy Select Sector SPDR Fund (XLE). But energy is expected to see some of the weakest earnings performance in Q1 and the full year, with profits forecast to drop 26% and 4%, respectively.
On the other hand, stocks in the information technology sector are lagging with a 2% gain this year despite anticipated growth of 20% and 18% in earnings for Q1 and the full year, respectively.
There are several reasons stock performance might disconnect from earnings growth in the short term.
Perhaps the growth is already priced in; or investors don’t anticipate the growth to last; or they just aren’t willing to pay for the growth due to various factors.
In the case of technology, those stocks may be taking a breather after a massive run up last year.
So yes, over the long term, earnings are the primary driver of stocks, but that says nothing about the short term.
