Sizable earnings beats from Big Tech and the big banks are likely to drive a surprise lift in corporate profits this earnings season.
S&P 500 index SPX, +0.39% companies are now projected to show positive earnings growth of 1.7% for the fourth quarter, with 58% of results already in. That would allow the index to snap out of an earnings recession, which exists when corporate profits post year-over-year declines for two or more quarters in a row.
See more: S&P 500 earnings recession set to end, as Q4 EPS swings to growth
At the end of last year, analysts expected December-quarter earnings to fall by 9.3%, which would have marked the fourth straight quarter of year-over-year declines. Overall projections began slowly improving as more results came in and they finally turned positive this week.
Helping fuel the momentum were big earnings beats in the financial services, information technology, and communications sectors. Since the S&P 500 is weighted by market value, larger companies like have a more sizable impact on the index’s overall profit trajectory.
The financial sector has been the largest contributor to the increase in earnings, according to FactSet Senior Earnings Analyst John Butters. The blended growth rate for the sector, which combines actual and projected results depending on whether a company has reported earnings yet, now stands at positive 17.2%, whereas expectations were for a 9.4% decline as of Dec. 13.
Companies that had meaningful impacts include JPMorgan Chase & Co. JPM, -0.20%, which beat earnings expectations by 44%, while Goldman Sachs Group Inc. GS, -0.09% beat by 62%, Citigroup Inc. C, +0.27% beat by 55%, Morgan Stanley MS, +1.29% beat by 48%, and Capital One Financial Corp. COF, +1.62% exceeded estimates by 87%
In the information technology sector, large earnings beats from Apple Inc. AAPL, -0.31%, Intel Corp. INTC, -1.04%, and Microsoft Corp. MSFT, +0.08% have helped drive the sector’s blended growth rate to 15.6% from an expectation of 1.5% in December. Alphabet Inc. GOOG, +1.73% GOOGL, +1.71% and Facebook Inc. FB, +0.60% also exceeded expectations by a wide margin, lifting the blended growth rate for the communications services sector to positive 6% compared with a projected 12.9% decline as of Dec. 31.
Outside those three sectors, Amazon.com Inc. AMZN, +0.63% and Ford Motor Co. F, +1.23% delivered large profit surprises as well that Butters said significantly contributed to the rise in the blended earnings growth rate.
Boeing Co. BA, -1.29% has been the biggest drag, as the company reported an adjusted loss of $15.25 a share, whereas analysts were expecting a $1.78 loss per share. Without Boeing’s results, the blended growth rate for the S&P 500 would be more than double what it is now, Butters wrote.
In all, 81% of the companies that have delivered results thus far saw better-than-expected earnings, he said.
The week ahead features another busy earnings docket, with 77 members of the S&P 500 set to report, including three companies that are in the Dow Jones Industrial Average as well. Walt Disney Co. DIS, +0.52% and Cisco Systems Inc. CSCO, +1.76% are among the biggest names due to post numbers.
Here’s what to watch for:
Stream-lined
Disney is expected to post another quarter in the red Thursday afternoon as the pandemic continues to weigh on its theme-park and media businesses, but investors seem willing to look past the company’s pandemic-impacted earnings performance, according to LightShed Partners analyst Richard Greenfield.
Of key interest in Disney’s report will be the company’s progress with its Disney+ streaming service. Disney continues to grow its subscriber base at a fast clip, but following the company’s last report, there was some concern about how much of that growth was coming from those who’ve signed up for the company’s Indian Hotstar product, through which Disney generates a far lower average revenue per user.
Disney earnings preview: Can Disney+ maintain its torrid pace to sustain the Magic Kingdom?
A new chapter for Twitter
Twitter Inc. TWTR, +0.48% likely benefitted from the same strong advertising trends that helped companies Pinterest Inc. PINS, +5.29% and Facebook late last year, but those results aren’t as important as what comes next.
Executives at Twitter will likely face questions Tuesday afternoon about user engagement trends following the decision to permanently ban former president Donald Trump from the platform due to his role in inciting the January violence at the U.S. Capitol.
“Regardless of one’s opinion of the President or Twitter’s recent policy actions, we view Trump as a unique animating force for activity and engagement on the platform that will not be easily replaced,” Wells Fargo analyst Brian Fitzgerald wrote after the ban was announced.
Bernstein analyst Mark Shmulik hypothesized that while Twitter’s engagement might take a hit, the ban could result in an “increase in brand-safe ad inventory” since some advertisers didn’t want their spots appearing near Trump-related content prior to the ban.
Opinion: Apple’s privacy changes are affecting more than just Facebook
Networking
The IT spending landscape seems to be improving, which Evercore ISI analyst Amit Daryanani said could drive slightly better-than-expected results for Cisco when the company posts results Tuesday afternoon. He’ll be looking for information about the vision of new chief financial officer R. Scott Herren as well as progress on the company’s efforts to generate more subscription revenue.
Rideshare recovery?
Lyft Inc. LYFT, +2.61% and Uber Technologies Inc. UBER, +1.26% likely continued on their rocky road to recovery in the fourth quarter, but Shmulik warned that the company’s growth rate for the period could be flat or even a bit below the third-quarter rate, given a rise in global cases, the appearance of new COVID-19 strains, and the winter weather.
Read: Uber’s growing, ‘exciting’ delivery business, possible rides recovery have analysts bullish
Lyft reports Tuesday afternoon, while Uber follows a day later. Uber executives will likely discuss the company’s recently announced decision to purchase Drizly, an alcohol delivery service.
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