S&P 500 and Nasdaq Earnings Preview: Energy Catches Up, AI Fuels Tech

The Big Picture: Growth on the Horizon

As we enter the second quarter earnings season of 2024, traders are eyeing company reports to gauge market health. The outlook is promising, with earnings growth expected to accelerate to 8.8% year-over-year, up from 5.9% in Q1, according to Forbes. Sales are projected to grow by 4.6%, providing a solid foundation for this improvement.

Art Hogan, chief market strategist at B Riley Wealth, suggests this could be a turning point: “If we’re looking for a catalyst to have broader participation in this rally this year, the second-quarter earnings reporting season may well be the start of that.”

Tech and Communication: The Usual Suspects Shine

The star performers this quarter are likely to be the communications and technology sectors. Communications, led by Meta and Alphabet, is set for 18.4% growth. The tech sector follows closely with a projected 16.4% boost, largely driven by NVIDIA’s AI-related profits.

Keep an eye on AI frontrunners like NVIDIA (NVDA), Meta Platforms (META), Alphabet (GOOGL), Microsoft (MSFT), and Amazon (AMZN), collectively part of the ‘Magnificent 7’ that have been driving market gains.

 

AI: The Game Changer

Artificial Intelligence continues to be a major earnings driver beyond just tech. Companies across various sectors are reporting increased efficiencies and new revenue streams from AI implementation. As Katie Nixon, CIO for Northern Trust Wealth Management, notes, “We’re seeing AI impact spread across industries, from healthcare to finance, potentially boosting earnings across the board.”

 

Banking Blues and Global Headwinds

Banks are facing challenges, with a 10% earnings decline expected due to stagnant loan growth and increased loss reserves. Moreover, multinational companies may see earnings impacted by global economic conditions, including a strong dollar and varying recovery rates in different regions.

Key players to watch include JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC), and Bank of New York Mellon (BK), whose reports will set the tone for the financial sector.

Energy’s Comeback and Interest Rate Impact

The energy sector is staging a comeback after a tough Q1, thanks to rising oil prices. Meanwhile, the current interest rate environment is having mixed effects. While it’s boosting net interest income for banks, it’s also increasing borrowing costs for many corporations, potentially squeezing margins.

While specific energy stocks aren’t singled out, the sector as a whole is poised for a strong showing, making it worth watching major players in this space.

Market Valuation Context

With the S&P 500 trading at about 21 times forward earnings, some analysts worry about overvaluation. Robert Pavlik of Dakota Wealth Management cautions, “I have doubts about earnings growth meeting expectations, due to weak consumer spending, sticky inflation and other concerning economic indicators.”

Looking Ahead: High Hopes and Potential Surprises

Expectations are high for H2 2024, with analysts predicting double-digit earnings growth. However, traders should be alert to potential surprises, such as unexpected shifts in consumer behavior or sudden regulatory changes that could impact specific sectors.

Reports from diverse companies like Delta Air Lines (DAL), PepsiCo (PEP), and Progressive (PGR) will provide insights into consumer behavior and economic health across various industries.

The Bottom Line: Watching for a Turning Point

While tech continues to lead, this earnings season could mark a shift towards a broader, more balanced market rally. Chris Haverland of Wells Fargo Investment Institute notes, “We think greater balance in profitability could lead to broader market participation in the coming quarters.”

Traders should monitor reports across various sectors for a comprehensive view of market health, always considering these insights in the context of their own investment strategy and risk tolerance.