Amid a chaotic stretch of news, Wall Street strategists are reminding investors that corporate profits remain paramount to the stock market rally.
Yardeni Research chief markets strategist Eric Wallerstein told Yahoo Finance that earnings will likely “be in the driver’s seat,” barring any unexpected changes to the economic narrative.
Several Big Tech companies are set to report earnings in the coming days that, in total, will feature reports from 169 S&P 500 (^GSPC) companies. Updates on inflation and the labor market also loom ahead.
These releases front-run another large week, with both the presidential election and the Federal Reserve’s next interest rate decision also slated to greet investors over the coming trading sessions.
Barclays head of US equity strategy Venu Krishna, echoing Wallerstein, noted that a “lot rides” on how upcoming Big Tech earnings fare.
While the incoming economic data — and how the Fed responds to it next week — will help shape how investors are viewing the interest rate environment over the next year, the incoming earnings will provide a clear read on the S&P 500 as a whole.
Krishna highlighted that while many have discussed the broadening of earnings growth beyond Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Nvidia (NVDA), analysts have been cutting estimates for the other 494 companies in the S&P 500. This comes as Big Tech earnings estimates haven’t been reduced as much, putting further pressure on the market’s largest companies to deliver earnings growth.
FactSet recently pointed out that the “Magnificent Seven” stocks, which include the Big Tech names and Tesla (TSLA), were set to grow earnings year over year by 18.1% this quarter, while the other 493 companies in the S&P 500 are expected to see just 0.1% growth.
So far, Tesla has done its part by topping analysts’ earnings per share estimates by nearly 21%. On Tuesday night, Alphabet also reported better-than-expected EPS, topping Wall Street’s estimates by nearly 16%. Results from Microsoft and Meta are slated for Wednesday followed by Alphabet and Apple on Thursday.
But “if they just meet expectations, that’s not good,” Krishna said. “The scale of surprises in the 5% to 6% range is reasonable. Anything less than that, I would be disappointed. Anything above that is phenomenal. They will be back in complete control compared to the rest of the market.”
Broadly, this earnings season has brought outsized rewards to companies that top analysts’ estimates for both revenue and earnings. In a note to clients on Monday, Bank of America’s equity and quant strategy team wrote that companies that have beaten Wall Street’s projections for both revenue and earnings have experienced a 2.48% increase on average in their stock price the next day, far outpacing the average 1.48% move.
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