The latest round of US earnings is kicking off with financial majors JPMorgan Chase NYSE:JPM, Wells Fargo NYSE:WFC, Citigroup NYSE:C and BlackRock NYSE:BLK. This will be followed by Netflix NASDAQ:NFLX, ASML, Procter & Gamble NYSE:PG and Johnson & Johnson NYSE:JNJ on Monday.
Despite the dip in US stocks yesterday caused by higher-than-expected inflation data, this earnings season is expected to show solid growth among US companies, particularly among tech firms, banks and pharmaceuticals. Yesterday’s drop does, however, serve as a reminder that some headwinds remain in place and that the cycle of low rates is unlikely to start until much later this year.
The results could end up a real patchwork of positives and negatives. For instance, of the three banks reporting today, JPMorgan Chase is in its own league with a share price rise of 74% over the past five while Wells Fargo underperformed the S&P 500 by a wide margin.
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Solid growth expected in 2024
ETF provider WisdomTree expects US companies to report a respectable 11.4% increase in earnings over the course of this year, likely building momentum in the second part of the year as the country’s economy pulls out of this last stretch of an inflationary environment.
“This (growth) could be achieved if economic data and the consumer stay strong. But we know growth in the US economy is set to slow, with real GDP forecasted to slow to 2.1% from about 2.5% in 2023,” the ETF fund manager said.
At the same time, lower inflation, improving real wage growth and declining rates could support a late-cycle recovery, notes WisdomTree. The forecast is for average growth across all US stocks, with some sectors expected to perform significantly better, particularly tech stocks, banks and pharmaceuticals.
For instance, the financial sector is the second largest sector in the S&P 500 with a weighting of 12.8% (compared with tech stocks’ weight of 30%) and has the additional bonus of providing attractive dividend and buyback yields. The three banks reporting Friday play a key role in a credit-driven economy and are expected to track the long-term US macroeconomic trend.
“The higher for longer interest rate scenario that is playing out will also add meaningful earnings growth for many financials and especially banks as they roll their balance sheet to higher interest rates,” said Saxo bank in Friday’s briefing, adding that after tech and pharma, banks are the third most attractive sector to invest in.
Next week will be big for pharma companies including Proctor & Gamble and Johnson & Johnson , Eli Lilly NYSE:LLY and Novo Nordisk. The big players dominate the consumer market for the most widespread health issues: Novo Nordisk with weight loss drug Ozempic, Eli Lilly with cancer treatments and Johnson & Johnson with medication for cardiovascular diseases. The sector is expected to report revenue growth of between 12-14% with earnings before interest above 25%.
Value in smaller stocks
Outside of the banking sector, tech and pharma investors are also beginning to look again at US value stocks as the inflationary environment eases.
“Value stocks deserve attention. Investors have been underweight in value for several years, yet value stocks are known to outperform in softer and harder landing environments, rendering them important to consider for a balanced US equity allocation,” notes WisdomTree.
Among those are IC equipment maker ACM Research NASDAQ:ACMR, car seat maker Lear and foodservice and carton cup maker Graphic Packaging NYSE:GPK.
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