(Bloomberg) — The strongest U.S. stock market rally in two years since the dot-com bubble is on track for the strongest U.S. stock market rally in two years since the dot-com bubble, as companies begin reporting quarterly earnings and serve as a key gut check on whether valuations are outperforming underlying reality. I’m on my way to my next big challenge.
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The S&P 500 index fell 1.5% on Friday, its worst decline since mid-December as an unexpected hiring surge fueled expectations that the Federal Reserve would not cut interest rates again until the second half of the year.
But the bigger problem is the high bar set by investor estimates. Reports are expected to show that the economy’s resilience helped S&P 500 companies’ fourth-quarter profits rise 7.3% year-over-year, according to data compiled. By Bloomberg Intelligence. This is the second-highest preseason forecast in the past three years, and a weaker result or outlook for the coming months could put the stock on shaky ground.
According to BI data, the S&P 500 index is expected to grow earnings per share by about 23% over the next 12 months, indicating unusually high expectations built into stock prices. Bottom-up consensus forecasts (a method of predicting future stock performance by summing individual analyst forecasts for each S&P 500 stock) call for EPS growth of 13% in 2025. Masu. That means those predictions would have to nearly double to justify what the S&P 500’s stock price would be. 500 transactions.
“We haven’t seen a bar this high since 2018,” said Michael Casper, senior equity strategist at BI. “It’s going to be much harder for companies to continue beating earnings expectations this year than it was in 2024, because the bar was much lower back then.”
The fourth quarter earnings season officially begins on Wednesday, led by financial industry standard-bearers JPMorgan Chase, Citigroup and BlackRock. Over the next week, more major companies are expected to report earnings, including Netflix and Procter & Gamble. And 3M.
Here are five key themes to watch as results are released.
expanding growth
One question being watched is whether earnings growth momentum will accelerate beyond the biggest tech companies, which could provide a tailwind for some of the market’s laggards.
With the economy doing well, companies other than big tech companies are expected to report their third straight quarter of profit growth, with profits up 4% and double digits by the first three months of 2025. This is expected to accelerate towards an increase, according to data compiled by BI.
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High-tech companies will continue to be the main drivers of the market. But investors should brace for the so-called Magnificent Seven, including Nvidia Inc., Apple Inc., Microsoft Inc., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc. and Tesla Inc., to report slower growth. are. : According to BI, earnings are expected to grow 22%, compared to average earnings growth of 34% in 2024, when the rest of the S&P 500 rose 4.5%.
Trade, duties and taxes
Investors are also looking for insight into how President-elect Donald Trump’s tax cuts, tariffs and deregulation policies will trickle down to corporate America. Some of his plans threaten to upend global trade and fuel inflationary pressures, but stock markets are focused on the upside of pro-growth policies.
But the type of tax cuts being considered in Washington could reduce the S&P 500’s tax burden by only about half of the 2017 package, according to BI’s Casper. He said this creates another hurdle in meeting the rapid growth in EPS that will be incorporated into the S&P 500 over the next 12 months.
The recent appreciation of the dollar is also an open question. Lower import costs may reduce the impact of higher tariffs, but it could also dim the outlook for multinationals by reducing export demand and the value of overseas earnings.
profit adjustment
Traders are focusing on a key indicator known as earnings revision momentum, which measures the upward to downward change in the S&P 500’s expected earnings per share over the next 12 months. According to BI data, this indicator remains in negative territory. It shows that Wall Street analysts are lowering their expectations heading into earnings season.
This is not uncommon, but it can be an early sign of an emotional change. For example, the momentum in the tech sector’s 12-month forward EPS revisions has declined in 11 of the past 12 weeks due to price cuts in fast-growing semiconductor companies.
Three of the S&P 500’s 11 sectors, including traditionally unpopular groups such as health care, as well as communications services and technology, are on track for double-digit growth in earnings in the final three months of 2024. The energy sector is expected to see a roughly 30% year-on-year profit contraction in the fourth quarter, according to BI data.
Surveillance margin
Traders will be keeping a close eye on operating margins as inflation eases and some cost pressures ease after rising post-pandemic inflation. Analysts expect fourth-quarter operating margins to be close to 16%, according to data compiled by BI, putting the worst of the pain in the rearview mirror as the outlook improves in coming quarters.
European revenue streams
Expectations for European earnings have been far more subdued as the continent grapples with sluggish economic growth in China, a key trading partner for domestic and luxury goods and car companies. The prospect of U.S. tariffs in 2025 is a concern for export-heavy industries.
Stoxx 600 returns are expected to increase by just 3% in 2024, while the S&P 500’s returns are likely to follow suit this year, at 8%, according to BI data. The focus will be on automakers like Volkswagen AG, which face threats such as protectionist policies, weak demand in China and the loss of U.S. tax credits for some plug-in cars. Luxury companies such as LVMH and Gucci’s parent company Kering SA will lead the way in consumer spending patterns.
“The overall picture for European equities is that the growth environment continues to be very challenging,” said Lilian Chauvin, head of asset allocation at Coutts.
–With assistance from Sagarika Jaisinghani and Michael Musika.
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