Trading Desk: First-Quarter Earnings and the Moment of Truth

The stock market has experienced a robust rally to start 2024, with gains recorded across multiple sectors. Now, as first-quarter earnings season ramps up, it will be a pivotal test to determine if the rally has staying power.

Analysts are looking for further signs of fundamental strength during the first quarter earnings release, despite persistent headwinds like high-interest rates. The consensus expectation is for earnings to grow 3.2% year-over-year for S&P 500 companies in the first quarter, according to Factset.

A Few Companies Drive the Growth

Currently, much of the earnings growth for the S&P 500 comes from the top 10 stocks, most of which are tech behemoths. Research from Goldman Sachs’ equity strategy team, led by David Kostin, shows these top companies expecting earnings to grow by 32% in Q1, while the remaining 490 stocks are projected to show an earnings decline of 4%.

Nvidia (NVDA) leads the charge with an expected 406% growth followed by Amazon (AMZN) at 175% growth.

Market experts are watching closely for signs that the strong performance can spread to a wider range of companies. This “catch-up” scenario could signal a broader economic recovery.

Charles Schwab global chief investment strategist Jeffrey Kleintop echoes this sentiment, saying a rotation to economically-sensitive sectors could provide “a second wind for the stock market.” 

What to Watch For

First-quarter earnings kicked off in earnest this week, with major banks and Delta Air Lines (DAL) reporting ahead of the weekend. As investors begin to dissect these reports and others to follow, here are some key areas worth focusing on:

Guidance — The Future Outlook

What kind of guidance are companies providing for the rest of 2024? Forward-looking statements from corporate executives will be scrutinized for clues about future demand, potential headwinds, and overall economic sentiment. 

Upbeat outlooks could give the stock market an additional boost, while a more cautious tone could lead to some selling pressure.

Rotation — Beyond the Tech Giants

It’s time to see if the rotation away from tech dominance is gaining traction. Scrutinize earnings reports from companies in sectors like industrials, materials, and energy. Are they showing a significant improvement in earnings and positive commentary about the business environment? 

A broader-based earnings recovery would be a strong signal to support a sustained market rally.

Specific Indicators to Track

Beyond overall earnings announcements, here are a few additional indicators to pay attention to:

Profit Margins

In a high inflation environment, are companies able to maintain healthy profit margins, or are costs beginning to eat into profits?

Consumer Spending

Companies that rely on strong consumer spending patterns will be of particular interest. Are there signs of strong demand, or any evidence of consumers starting to pull back?

Labor Market

How are companies describing the labor market? Are they having difficulty hiring or facing pressure for wage increases? Labor conditions offer a window into the broader economy.

Stakes Are High

The first-quarter earnings season arrives at a critical juncture for the stock market. After a positive kick-off to the year, investors anxiously await a clearer picture of corporate health. Key factors like inflation, consumer spending patterns, and the health of the job market will come into clearer focus as companies report their results.

Will the optimism that fueled the market rally persist, or will doubts start to creep in? If companies deliver strong earnings, issue favorable outlooks, and hint at a broader economic recovery, the rally could gain even more momentum.  This could further fuel investor confidence, paving the way for potential market gains throughout the year.

However, if earnings disappoint, guidance turns cautious, or economic headwinds appear larger than anticipated, a pullback might be in store. A sense of disappointment could cause investors to turn more risk-averse and reassess their positions.

The first-quarter earnings season isn’t just about individual company performance — it’s a referendum on the overall health of the economy and its ability to continue supporting the upward trajectory of the stock market. The stakes are high, and investors everywhere will be watching closely.