This past week was a difficult one for markets, as investors digested March’s higher-than-hoped-for inflation data, which further delayed any anticipated interest rate cuts. Yet earnings results could help lift stocks out of their funk.
The
fell 1.6% for the week, marking its second straight week of declines. It was the index’s largest two-week decline since the market downturn in late October.
Yet while a strong economic backdrop may have propped up inflation, it’s also likely to have contributed to strong first-quarter results for corporations. That’s good news for stocks—if they can get out ahead of lofty expectations.
Reporting season began in earnest this past week, and with markets already assuming a Goldilocks scenario of falling inflation and stable economic growth, the onus is on companies to deliver, noted Citigroup U.S. equity strategist Scott Chronert.
“While very early, the first set of first-quarter reports from the banks highlights this risk of guidance falling short of lofty implied growth expectations, even as the overall fundamental picture remains healthy,” he wrote in a note to clients this week.
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On Friday, shares of financials like
and
declined after they released quarterly results—and investors fretted about the impact of interest rates.
Nonetheless, Chronert argues that investors shouldn’t be too downbeat. “A buying opportunity may present as we progress through the reporting period if we see consistent positive surprises followed up with a rightsizing of market implied growth expectations,” he wrote.
Indeed, Citi hasn’t changed its upbeat view of the market, even though the S&P 500 has already surpassed its 5100 target for the year, or 21 times the average $245 a share the firm expects the index’s stocks will earn. Citi’s bull case for the index is 5700—a figure that Chronert notes has gotten increased attention after the market’s first-quarter rally.
UBS also expects the S&P 500’s full-year earnings to hit $245 a share (and $260 in 2025). The firm’s head of U.S. equities, David Lefkowitz, is looking for first-quarter earnings-per-share growth around 7% to 9% year over year, similar to the fourth quarter’s pace.
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His confidence stems from the fact that companies which already reported results for quarters ended in February have been relatively strong—as has the economic backdrop, as evidenced by labor market and manufacturing data.
Therefore, this rising tide should lift more companies. “Growth is starting to broaden out with non-Magnificent 7 stocks poised to generate positive, albeit modest, growth for the first time since the fourth quarter of 2022. This trend should accelerate over the balance of the year,” Lefkowitz wrote in a Friday note.
That’s a nice contrast to the fourth-quarter reporting season: Heading into those reports, analysts expected earnings for the Magnificent Seven, minus
Tesla
,
to surge some 54%—and earnings to decline more than 10% for the S&P 500’s remaining 494 components.
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Lefkowitz recognizes that the first-quarter rally could leave stocks due for a breather, though he thinks any pause will be temporary. “The environment remains supportive driven by solid earnings growth, likely Fed rate cuts, and surging investment in AI,” he writes. “In our base case, we expect the S&P 500 to end the year around 5200.”
Yet he, like Chronert, notes that his base case might prove too conservative. If inflation improves or earnings knock it out of the park, he writes that UBS’s “upside scenario of 5500 appears reasonable.”
So although the second quarter has so far been rockier than the first, there’s still a chance for bulls to take back the reins.
Write to Teresa Rivas at teresa.rivas@barrons.com
