As the Q1 earnings season of the US stock market approaches its end, Wall Street analysts are raising their profit expectations for the second quarter at the fastest pace in two years. This means that the market's confidence in the profit prospects of American companies is increasing, which is clearly a positive signal for the US stock market.
Q1 performance of US stocks mostly exceeded expectations
Data shows that as of now, 459 S&P 500 index constituent companies have released their financial reports for this quarter. According to the currently released financial reports, the profit growth rate of S&P 500 index companies is expected to reach 7.1% in the first quarter, far exceeding the analyst's pre quarter forecast of 3.8%.
According to data compiled by Bloomberg, 79% of companies in the S&P 500 index exceeded expectations in their first quarter profits, compared to 76% in the previous quarter.
Due to most financial reports performing better than expected, Wall Street has also significantly increased its profit expectations for the second quarter (as of June).
At the end of 2022 and the first half of 2023, the US stock market experienced a decline in profit growth for three quarters. However, with the recovery of the US economy and consumer demand, the profit growth rate of US stock companies has rebounded for two consecutive quarters since the third quarter of last year, and the current trend is set to create a third consecutive quarter of rebound.
BI data shows that two key areas closely related to the economic cycle - energy and raw material companies - have led to an increase in profits for listed companies.
Obviously, it will be beneficial for US stocks
Wendy Soong, senior analyst at BI, said: This is a good sign for the direction of the US stock market this year, as it indicates that more analysts are raising company expectations after realizing that previous forecasts may be too pessimistic, which helps support operating profit margins.
BI data shows that a closely monitored indicator - profit correction momentum - has reached its highest level since September last year. This indicator measures the upward and downward changes in expected earnings per share over the next 12 months. Senior BI analysts indicate that in the coming weeks, analysts may further increase their profit expectations.
Despite recent indications from several Federal Reserve officials that they intend to maintain higher interest rates for a longer period of time, the US stock market is still approaching historical highs, which is an encouraging prospect.
Thomas Martin, Senior Portfolio Manager at Global Investments, said:; Quota; This is definitely a positive signal because I want to invest in companies with rising profit estimates, as these stocks have good profit prospects& Amp; Quota; The company is increasing its holdings in industrial companies related to data center infrastructure business.
Wall Street values guidance more than performance?
However, it is worth noting that although Wall Street analysts have raised their profit expectations for the second quarter, their expectations for the full year of 2024 have remained almost unchanged. Bloomberg compiled data shows that Wall Street expects S&P 500 index constituent companies to have almost no change in earnings per share by 2024 compared to a year ago.
BI analysts suggest that this may be due to the fact that most companies have not released longer-term financial reporting guidelines for the future. Analysts are unwilling to revise their expectations for the second half of this year until more companies release profit guidance in the coming quarters.
So far, about 25% of companies in the S&P 500 index have provided quarterly performance guidance, with about 80 companies only announcing their second quarter earnings per share expectations but not their revenue outlook.
From a historical perspective, the stock market has responded more to performance guidelines than to the performance itself, and traders typically do not favor companies whose performance guidelines are lower than expected - a situation that is more evident in this financial reporting season.
BI data shows that during the current reporting period, if a company's guidance shows a decrease in both earnings per share and revenue, its stock will lag behind the S&P 500 index by nearly 7% on the day after its performance announcement, which is the worst performance since early 2020.
Looking ahead, some of the largest retailers in the United States - Home Depot, Wal Mart, Target, etc. will release their financial reports this week to provide investors with key insights on consumer strength, economic growth trajectory, and corporate profitability. In addition, Nvidia, the leader of the artificial intelligence craze, will also release its financial report next Wednesday (May 22).