The earnings season has seen an uptick in pace, with several S&P 500 companies reporting and more set to announce their results in the upcoming weeks. The previous drag from bank and healthcare earnings has been offset by a more diversified company mix, boosting earnings expectations for the quarter. The Magnificent 7, consisting of major companies like Microsoft, Meta Platforms, Amazon, Apple, NVIDIA, Alphabet, and Tesla, soared by almost 6% after a tough week, contributing to the overall positive trend in the market.
Notable companies reporting earnings this week include McDonald’s, Starbucks, Coca-Cola, Amazon.com, Eli Lilly, Apple, and Berkshire Hathaway. Blended earnings, which combine actual results with estimates for companies yet to report, have rebounded to match forecasts at the end of the quarter, indicating a positive trend in overall earnings performance. The communication services sector, along with the industrial, technology, and consumer discretionary sectors, have been significant drivers of the improvement in earnings estimates for the first quarter.
Sales growth for companies is closely tied to nominal GDP growth, combining real economic growth with inflation. With nominal GDP growth expected to be solid year-over-year for the first quarter, companies should experience a tailwind in terms of revenue growth. The blended earnings performance so far has underperformed expectations at the end of the quarter, but sales growth has improved and surpassed initial expectations heading into earnings season.
While first-quarter GDP growth was slightly below consensus estimates, the details of the report reveal strong domestic demand, excluding the impact of volatile inventories and net exports. The inflation component of the report is more concerning, with core PCE inflation accelerating to 3.7% quarter-over-quarter annualized. Despite inflation concerns, the odds of a June Federal Reserve rate cut have decreased, with the probability of rate cuts in July also declining. The prospect of economic growth remains intact, supported by resilient economic indicators and positive earnings reports.
The upcoming week will see a focus on key earnings reports from companies like Apple and Amazon.com, as well as the Federal Reserve meeting and Berkshire Hathaway’s annual meeting. Chair Powell’s comments at the Fed meeting will be closely watched for insights into the timing of rate cuts in response to inflation data. Overall, the market continues to navigate the challenges of higher inflation and rising yields, while remaining optimistic about the prospects for economic growth and corporate earnings in the coming months.
