Earnings Season Gains Momentum Amidst Positive Economic Signals
The third-quarter earnings season shifted into high gear last week, with 20 S&P 500 companies, predominantly major banks, unveiling their financial results. A significant 79% of reporting companies surpassed earnings expectations, setting a positive tone for the weeks ahead. This encouraging performance, coupled with moderating inflation data, propelled stock markets upward and eased pressure on bond yields. The S&P 500 index enjoyed a robust 2.9% gain, while the "Magnificent Seven" – a group of high-performing tech giants including Microsoft, Meta, Amazon, Apple, Nvidia, Alphabet, and Tesla – saw a collective 2% increase. Bank stocks, in particular, surged by an impressive 8.2%, driven by stronger-than-anticipated earnings.
The positive momentum in the market stemmed from a confluence of factors, most notably the better-than-expected bank earnings and encouraging inflation figures. While the headline Consumer Price Index (CPI) ticked up to 2.9% year-over-year, underlying details revealed a deceleration in services inflation, a key indicator closely watched by economists. This easing of services prices, combined with the anticipated slowdown in housing costs, is expected to contribute to a moderation in the overall inflation rate in the coming months. This positive inflationary trend provided much-needed relief to the market, which had been grappling with rising bond yields in recent weeks.
Prior to last week’s positive developments, escalating bond yields had begun to exert downward pressure on stock valuations. The yield on the 10-year U.S. Treasury bond had climbed to nearly 4.8% by January 14th, up from a low of 3.6% in mid-September 2024. Significantly, this rise was primarily attributed to an increase in real yields (yields adjusted for inflation expectations) rather than escalating inflation fears. The encouraging inflation report prompted a decline in the 10-year Treasury yield to 4.6%, offering a respite to the stock market.
This week promises a further influx of earnings reports, with 40 S&P 500 companies scheduled to release their results. While the financial sector, particularly banks, will continue to be a prominent feature, other key players like 3M, Netflix, Procter & Gamble, and Johnson & Johnson will also be sharing their performance updates. Market participants will be closely scrutinizing these reports for insights into the broader economic landscape and sector-specific trends.
The financial sector played a pivotal role in last week’s earnings growth surge. According to FactSet data, industry giants like JPMorgan Chase, Goldman Sachs, Morgan Stanley, and Bank of America were the primary contributors to the sector’s earnings boost, which jumped to 47.5% from 39.3%. While loan growth remained relatively modest during the fourth quarter, a surge in capital markets activity significantly bolstered bank earnings. Looking ahead, the financial sector is projected to lead the S&P 500 in year-over-year earnings growth, followed by the technology and communications services sectors. In contrast, the energy sector is anticipated to experience a substantial decline in earnings, approaching 30%, due to the sharp drop in oil prices compared to the previous year.
The "Magnificent Seven" tech behemoths will once again be in the spotlight this earnings season, given their significant influence on overall market performance and earnings growth. These companies represent a substantial portion of the S&P 500’s market capitalization and are expected to deliver robust earnings growth. FactSet projects a 21.7% year-over-year earnings increase for the Magnificent Seven, significantly outpacing the 9.7% growth forecast for the remaining S&P 500 companies. The earnings reports for these tech giants are scheduled to commence the week of January 27th.
Several macroeconomic factors are also expected to influence earnings performance in the coming weeks. The substantial decline in oil prices year-over-year is likely to weigh on the earnings of energy and materials companies. Additionally, the strengthening of the U.S. dollar during the fourth quarter may marginally dampen international earnings growth. Sales growth, closely tied to nominal GDP growth (which combines real GDP growth with inflation), has slightly exceeded expectations at this early stage of the earnings season, registering at 4.7% compared to an estimated 5% year-over-year nominal GDP growth. The technology sector is anticipated to exhibit the strongest sales growth, while the energy sector is projected to see a decline in revenue due to lower oil prices.
Thanks to the strong performance of the financial sector, the blended earnings growth rate for the quarter currently stands at +12.5% year-over-year, surpassing the +11.9% expectation at the end of the quarter. This blended rate combines actual results from reported companies with consensus estimates for those yet to report. With a relatively light economic calendar this week, market attention is expected to remain focused on earnings announcements. Investors will be keenly observing forward earnings guidance for 2025, as current consensus estimates anticipate double-digit profit growth. Any significant deviations from these expectations could trigger market volatility. Furthermore, political developments, such as policy announcements following President Donald Trump’s inauguration, could also introduce an element of uncertainty and impact specific sectors. While the banking sector’s robust start to the earnings season provided a positive impetus, this week’s reports from a broader range of sectors, including additional financial institutions, will offer a more comprehensive view of corporate performance and the overall economic outlook.
