Earnings season has started far better than forecasts anticipated

Markets are not yet reflecting upbeat news of resilient consumer spending, positive big tech results, and firms' confident forecasts

Heavyweights Microsoft, Google-owner Alphabet and Facebook-parent Meta all delivered upbeat results last week. Stock picture: Brian Lawless

Investors have had plenty to cheer this earnings season so far — resilient consumer spending, upbeat big tech results, and confident economic outlooks from corporate executives. Yet, the stock market is not reflecting the optimism.

The sharp US and European equities rally ahead of results stretched valuations and raised the bar for further gains, but worries about a recession and higher interest rates have capped sentiment.

With investors now preparing to hear from US industrials, automakers, and retailers for further clues on the health of the consumer, here are four key takeaways from the season so far:

‘Investor exhaustion’

The US stock rally leading up to the season was at odds with the trend in the previous three quarters when the market had sold off, according to Morgan Stanley strategists. That has made it difficult for equities to extend their advance amid concerns about a staunchly hawkish Federal Reserve and declining earnings, Morgan Stanley’s Michael Wilson, one of the most bearish voices on Wall Street, wrote in a recent note.

Even as nearly 81% of S&P 500 companies have beaten analysts’ estimates — the biggest proportion since the third quarter of 2021 — the median stock has outperformed the index by just 0.1% on the day of results, according to data from Bloomberg Intelligence.

In Europe, too, over 70% of firms have reported better-than-feared profit so far, but a rally in the Stoxx 600 Index has stalled.

“While first-quarter results are coming in better than expected, share prices have not rebounded as investors are increasingly concerned about delayed declines in fundamentals as a result of an impending recession,” said chief investment strategist at CFRA Research Sam Stovall.

Solid big tech results

Going into the season, analysts were forecasting the steepest drop in quarterly profits for US technology stocks since at least 2006. Early reports show those expectations may have been too pessimistic.

Heavyweights Microsoft, Google-owner Alphabet and Facebook-parent Meta all delivered upbeat results last week, sparking a bounce in the Nasdaq 100 Index and calming worries that a 20% rally in the gauge had gone too far. Amazon also had strong results, although a downbeat outlook fuelled a slide in its shares.

Sustained pricing power

The impact of sticky inflation was seen as one of the main risks to earnings in the first quarter. But a range of companies, including Procter & Gamble and Nestlé, have been able to pass on higher prices as consumers prove willing to dip into pandemic-era savings despite slowing economic growth. Mentions of pricing power in news articles are on the rise, while those of cost cuts are dropping, according to data compiled by Bloomberg. And with the likes of PepsiCo and Danone expecting demand to remain solid, a Citigroup index shows earnings downgrades are starting to slow.

That’s not to say all sectors have been able to sustain higher prices.

Where consumer goods firms have had a strong showing, Tesla has been among the most high-profile companies to announce cuts in recent months as competition in the electric-vehicle market heats up.

No recession alarms

The chorus of economists warning about a possible US recession has grown following recent turmoil in the banking sector. The tone among company executives, however, has been more “balanced” as they “acknowledged rising risks of a downturn but weren’t baking one in explicitly,” RBC’s Calvasina said.

While JPMorgan Chase chief executive Jamie Dimon warned about the risks of a contraction in the world’s biggest economy, he said it won’t necessarily happen even if more US regional banks fail.

“I’m not surprised that there isn’t yet much broader pessimism about the outlook,” said James Athey, investment director at Abrdn.

“The reality is that the job market looks very strong, therefore consumption is for now holding up well and CEOs don’t want to talk down their own stock or the economy.”

• Bloomberg