S&P 500 tests growth of tech giants and heads for its best earnings season in two years

With the S&P 500 index up 17% so far this year, reaching peak after peak thanks to the double push of the big technology companies and the furor unleashed around artificial intelligence, the earnings report season that begins this week in the United States will be the thermometer used by investors and analysts to check on the evolution of companies. Corporate accounts will serve as a possible catalyst for the second half of the year for a market that has seen how the Federal Reserve is in no hurry to activate interest rate cuts and instead continues to scrutinize growth, inflation and labor market data.

The analyst consensus compiled by Factset remains optimistic and expects S&P 500 companies to post 9% profit growth in the second quarter, their strongest quarterly advance since the start of 2022, a period marked by soaring food and energy prices in the wake of the outbreak of war in Ukraine. However, a growing number of experts are pointing out that the exorbitant valuations of Nvidia, Apple, Microsoft, Amazon and Meta could clash with more moderate earnings than in previous quarters. Deutsche Bank strategists estimate that these companies will increase their earnings by 30%, down from 38% in the previous quarter.

Goldman Sachs analysts are more moderate, believing that the large-cap companies most exposed to artificial intelligence will record sales growth of 17% in the second quarter of the year in year-over-year terms. The investment bank also expects the percentage of companies that will outperform earnings per share growth expectations to decline in the earnings season ahead as, they say, “consensus forecasts set a higher bar than in previous quarters.” “Lofty implied growth expectations” mean that it is likely that markets will need to see solid increases to sustain recent rallies or push the stock market higher, Citi’s research department adds. So far this year, the S&P 500 index has set a total of 34 records, forcing investment banks to modify their expectations for the entire year on several occasions.

The first test will come on Friday, when JP Morgan, Wells Fargo and Citi publish their quarterly accounts. Morgan Stanley analysts believe that JP Morgan and Citi will accelerate their share buyback plans, hence RBC strategists recommend overweighting the large U.S. entities over smaller banks, which are more exposed to a possible increase in delinquencies. For the time being, the three banks are up more than 21% so far this year, more than the 16% rise recorded by the S&P 500 banking sector.

The big technology companies will not report earnings until the end of the month, and we will have to wait until August 23 to find out the evolution of Nvidia’s numbers, which in the first quarter of the year shot up 262% in revenue and 628% in profits. The company, the epicenter of the AI frenzy, remains one of the three most valuable companies in the world by market capitalization, along with Apple and Microsoft. A group that was joined yesterday by Taiwan’s TSMC, which surpassed the billion-dollar market capitalization mark.

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