Anticipated Earnings Growth Fuels Optimism for Tech Stocks
As the US braces for the first-quarter earnings season, a surge in technology-related company profits is poised to spearhead growth for the S&P 500, potentially reigniting stock market optimism after a tepid beginning to April. Despite concerns about the interest rate outlook and the Federal Reserve’s rate cut timeline being deferred due to a resilient economy, analysts remain hopeful. LSEG data predicts a 5 percent increase in S&P 500 companies’ earnings from the previous year’s first quarter, following an impressive 10.1 percent growth in Q4 of 2023, with technology giants leading the charge.
The earnings season is set to commence with reports from prominent US banks and will quickly escalate with forthcoming results from influential players such as Netflix, Procter & Gamble, UnitedHealth, and Travelers Cos. Particularly noteworthy is the communication services sector, including Alphabet, which is projected to have experienced a 26.7 percent earnings boost. Similarly, the technology sector, featuring Nvidia, Apple, and Microsoft, is anticipated to report a robust 20.9 percent rise.
Investor confidence in artificial intelligence continues to soar, as evidenced by the Nasdaq’s record high in late February, spurred by AI enthusiasm that has particularly benefited Nvidia and other tech stalwarts. BofA Securities strategists foresee a vigorous capital expenditure cycle driven by AI and mega projects that will extend benefits beyond semiconductors to power and commodities sectors.
Despite the S&P 500’s recent dip in April, it has achieved multiple record highs since January and has climbed approximately 9 percent year to date. However, strong consumer price readings from the US Labor Department have led some investors to speculate that the Fed might postpone rate cuts until later in the year, which could impact growth stocks that are usually more sensitive to interest rate hikes.
Oliver Pursche of Wealthspire Advisors highlights that while a robust economy is preferable to one reliant on Federal Reserve stimulus, concerns about consumer debt and spending outpacing wage growth could become more pronounced during this earnings season. While sectors like energy, materials, and healthcare are expected to report declines, analysts project that Q1 will mark the smallest earnings increase for 2024, with an overall profit growth of 9.8 percent anticipated for the year. BofA Securities strategists also predict that operating leverage will bolster margins as demand continues to recover.
