Q1 Earnings Season Looms Amid Growing Doubts Over Fed Rate Cuts - What to Expect

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Wall Street's first-quarter earnings season has unofficially kicked off this morning as notable banks like JPMorgan Chase (NYSE: JPM ), Wells Fargo (NYSE: WFC ), Citigroup (NYSE: C ), and BlackRock (NYSE: BLK ) reported a mixed bag of results.

The following week sees high-profile names like Netflix (NASDAQ: NFLX ), Bank of America (NYSE: BAC ), Goldman Sachs (NYSE: GS ), Morgan Stanley (NYSE: MS ), Visa (NYSE: V ), American Express (NYSE: AXP ), UnitedHealth (NYSE: UNH ), Procter & Gamble Company (NYSE: PG ), Johnson & Johnson (NYSE: JNJ ), General Motors (NYSE: GM ), and Pepsico (NASDAQ: PEP ) report earnings.

The Q1 earnings season gathers momentum in the final week of April when the mega-cap tech companies, including Microsoft (NASDAQ: MSFT ), Apple (NASDAQ: AAPL ), Alphabet (NASDAQ: GOOGL ), Amazon (NASDAQ: AMZN ), Meta Platforms (NASDAQ: META ), Intel (NASDAQ: INTC ), and IBM (NYSE: IBM ) are all scheduled to deliver their quarterly updates.

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According to FactSet estimates, earnings per share for the S&P 500 are expected to grow +3.2% in the first quarter when compared to the same period last year. That is lower than the +5.7% annual earnings growth for the quarter forecast on January 1.

S&P 500 Earnings Growth

Source: FactSet

As the chart above shows, the Utilities sector (NYSE: XLU ) is expected to report the largest annualized earnings growth rate of all eleven sectors, at +23.7%. The space includes notable companies such as NextEra Energy (NYSE: NEE ), Southern Company (NYSE: SO ), Duke Energy (NYSE: DUK ), Dominion Energy (NYSE: D ), and PG&E Corp.

The Information Technology (NYSE: XLK ) sector, which includes names like Microsoft, Nvidia (NASDAQ: NVDA ), Broadcom (NASDAQ: AVGO ), Oracle (NYSE: ORCL ), Salesforce (NYSE: CRM ), Advanced Micro Devices (NASDAQ: AMD ), Super Micro Computer (NASDAQ: SMCI ), as well as Cisco (NASDAQ: CSCO ), and Qualcomm (NASDAQ: QCOM ), is forecast to come in second, with +20.4% year-over-year earnings growth.

Elsewhere, the Communication Services (NYSE: XLC ) sector is expected to report the third-highest annualized earnings growth rate, at +19.4%. Some of the biggest names in the sector include Google-parent Alphabet, Facebook owner Meta Platforms, Netflix, Walt Disney (NYSE: DIS ), as well as Verizon (NYSE: VZ ), and AT&T.

The Consumer Discretionary (NYSE: XLY ) sector, which is perhaps the most sensitive to economic conditions and consumer spending, is forecast to deliver the fourth-highest year-over-year earnings growth rate, at +15%. The sector includes notable companies like Amazon, Walmart (NYSE: WMT ), Home Depot (NYSE: HD ), McDonald’s, Nike (NYSE: NKE ), Starbucks (NASDAQ: SBUX ), and Coca-Cola (NYSE: KO ).

In contrast, earnings from companies in the Energy sector (NYSE: XLE ), which includes oil and gas giants such as ExxonMobil (NYSE: XOM ), Chevron (NYSE: CVX ), and Conoco Phillips, are expected to fall -25.8% compared to last year - the worst drop of any sector by far.

The Materials sector (NYSE: XLB ) - which includes companies in the metals and mining, chemicals, construction materials, and containers and packaging industry - is projected to report the second worst Y-o-Y earnings slump of all eleven sectors, with EPS set to tumble -24.1% from a year earlier, per FactSet.

Meanwhile, revenue expectations are slightly more positive, with sales growth expected to rise +3.5% from the same quarter a year earlier. If that is in fact the reality, FactSet pointed out that it would be below the five-year average revenue growth rate of +6.9%.

S&P 500 Revenue Growth

Source: FactSet

As seen above, eight sectors are projected to report year-over-year growth in revenues, led by the Communication Services and Information Technology sectors, at +7.3% and +7.2%, respectively.

On the other hand, three sectors are predicted to report a y-o-y decline in revenues, led once again by Materials and Energy, at -5.1% and -3.9% respectively.

Forward Guidance

As is usually the case, it is more about forward guidance than results, given the uncertain macroeconomic outlook.

Beyond the top-and-bottom-line numbers, investors will pay close attention to how company executives think the current economic environment of high interest rates, elevated inflation, and rising commodity costs will impact the rest of their year.

Other key issues likely to come up will be the health of the U.S. consumer, future hiring plans, as well as lingering supply chain concerns.

Meanwhile, in the tech sector, artificial intelligence is likely to be a big theme again. Investors will look to see if companies can turn optimism over AI developments into an improved bottom line.

What To Do Now?

Amid the current backdrop, I used the InvestingPro stock screener to search for companies that are poised to deliver annualized growth of at least 30% or more in both profit and sales as the first quarter earnings season kicks off.

In total, just 13 names showed up.

InvestingPro Screener Filters

Source: InvestingPro

InvestingPro's stock screener is a powerful tool that can assist investors in identifying high quality stocks with strong potential upside. By utilizing this tool, investors can filter through a vast universe of stocks based on specific criteria and parameters.

Some of the notable companies to make the list include Nvidia, Broadcom, Blackstone (NYSE: BX ), Micron (NASDAQ: MU ), CrowdStrike (NASDAQ: CRWD ), Coinbase (NASDAQ: COIN ), Super Micro Computer, Nu Holdings, Cloudflare (NYSE: NET ), Zscaler (NASDAQ: ZS ), and DraftKings (NASDAQ: DKNG ).InvestingPro Screener

Source: InvestingPro

With InvestingPro's stock screener, investors can filter through a vast universe of stocks based on specific criteria and parameters to identify cheap stocks with strong potential upside.

InvestingPro empowers investors to make informed decisions by providing a comprehensive analysis of undervalued stocks with the potential for significant upside in the market.

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Disclosure: At the time of writing, I am long on the S&P 500, and the Nasdaq 100 via the SPDR S&P 500 ETF (SPY (NYSE: SPY )), and the Invesco QQQ Trust ETF (QQQ). I am also long on the Technology Select Sector SPDR ETF (NYSE: XLK ).

I regularly rebalance my portfolio of individual stocks and ETFs based on ongoing risk assessment of both the macroeconomic environment and companies' financials.

The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.

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