American companies are strongly outperforming expectations, with the end of the business results season approaching, after about two-thirds of companies announced their profits, while major American banks are raising their profit expectations this week.
This positive background for the largest companies in America contributes to the continued strong performance of the stock market at the beginning of the year, which is also a scenario that far exceeds what analysts had envisioned even early last month. Questions were raised at the time about how companies and consumers would deal with high interest rates.
As it turns out, 80% of S&P 500 companies reporting results this earnings season have surprisingly outperformed their earnings, easily beating the 10-year average of 74%, according to Bloomberg Intelligence data as of Friday afternoon. Energy, IT and consumer goods stocks are among the sectors leading the trend.
This development makes analysts raise their expectations. Wall Street now expects fourth-quarter earnings for S&P 500 companies to grow at an average rate of 6.5% from a year earlier, the best since mid-2022, and up from a weak forecast of 1.2% in early January, according to Bloomberg Intelligence.
“People continue to be surprised by the autonomy of earnings, the consistency of consumers and their propensity to spend, and the anecdotal and tangible results that AI delivers,” said David Wagner, portfolio manager at Aptus Capital Advisors. So far, it's been a strong earnings season.
Positive business results season led by technology
Technology giants Amazon.com and MetaPlatforms provided some of the most notable upward surprises in earnings. However, this same situation applies to companies in other sectors. To name a few, earnings for Colgate-Palmolive, Clorox, and Tyson Foods Inc. also exceeded expectations.
To be fair, in light of the weak expectations for the results of the S&P 500 companies’ stock results, the profit prospects were low, as some strategists saw weeks ago that the expectations of analysts at US banks were bleak. Now, the result is that companies appear to be continuing the growth in profits from the previous quarter, which halted a decline in profits that lasted for three consecutive quarters.
Moreover, as confidence grows that the Fed will be able to tame inflation without causing an economic slowdown, expectations may become more optimistic.
“Excluding the outliers and the outliers — I think everyone was surprised by the strength of Amazon and Meta — the rest of the earnings season was good,” said Kim Forrest, chief investment officer at Bokeh Capital Partners. I realize this sounds cold, but I'll take it, because this time last year everyone was beating the drums of recession, which doesn't seem to be the case now.
With all the focus on the market relying on a low share count for its rally, investors are scrutinizing very expensive AI products more closely. All of the so-called Big Seven companies announced their results, except for one company, while Nvidia is expected to announce its results on February 21. With the exception of Tesla, this group of seven companies recorded strong earnings growth, pushing stock prices higher.
What about medium and small companies?
A number of major consumer-related companies are also scheduled to announce their results, as Toymaker Hasbro will release its results next week, and Walmart will announce its results on February 20.
It is noteworthy that while the performance of large American companies may be better than expected, the performance of smaller companies was not good, in a sign that may be worrying about the performance of some parts of the economy with traders ruling out bets on determining when the Federal Reserve will start reducing interest rates. .
In addition to the negative surprises in the business results of companies included in the Russell 2000 index, which includes small companies, the profits of about 38% of companies fell below expectations, which is the highest since 2019, according to Bloomberg Intelligence data. About 30% of the companies listed in the index announced their results.
Investor demand for this segment of companies has declined recently, after the index fell compared to the S&P 500 in January by the largest difference since March 2023, which contradicts the market movement at the end of the year.
“We still have a quarter ahead that will see earnings growth turn to the positive side for the cyclical segment of large-, mid-cap and small-cap companies,” said Drew Pettit, director of US equity strategy at Citigroup. We are still in a market driven by the business results of major blue chip companies.
