US quarterly earnings to feature big growth in tech-related companies

Big technology-related company earnings are expected to again lead S&P 500 profit growth in the upcoming US reporting period, which could refuel optimism for stocks after a weak start to April.

Interest rate outlook worries hang over the first-quarter earnings season, with the expected timeline for Federal Reserve rate cuts being pushed back as the economy remains robust.

Analysts expect S&P 500 companies in aggregate to report earnings increased 5 per cent in the first quarter from a year earlier, according to LSEG data, after much stronger-than-expected earnings growth of 10.1 per cent in the fourth quarter 2023 led by gains in megacap tech.

Earnings from some big US banks unofficially start the reporting period on Friday. From there, the season shifts into high gear, with results from Netflix (NFLX.O), Procter & Gamble (PG.N), UnitedHealth (UNH.N) and Travelers Cos (TRV.N) all due next week.

Earnings for the communication services sector (.SPLRCL), which includes such names as Alphabet (GOOGL.O), are forecast to have risen 26.7 per cent from a year ago. The technology sector (.SPLRCT), which includes Nvidia (NVDA.O), Apple (AAPL.O) and Microsoft (MSFT.O), is expected to have climbed 20.9 per cent in the first quarter, according to LSEG data.

Communication services led earnings gains in the fourth quarter of 2023, with 53.3 per cent year-over-year growth, while technology earnings grew 24.2 per cent.

Investors remain optimistic about artificial intelligence. The Nasdaq (.IXIC) in late February reached a record high close for the first time in over two years, as AI fever has driven rallies in Nvidia and other tech heavyweights.

“We see a healthy capex cycle ahead from both AI and other mega projects… benefiting not just semis, but also power and commodities,” BofA Securities strategists wrote in a research note Thursday.

The S&P 500 (.SPX) has hit a string of record highs since late January. It is up roughly 9 per cent year to date, but down about 1 per cent so far for April.

The US Labor Department this week reported the third straight month of strong consumer price readings. Some investors now feel the Fed might delay cutting rates until September.

Growth stocks tend to be more sensitive to higher interest rates.

“I would rather have a strong economy than one that requires stimulus from the Federal Reserve,” said Oliver Pursche, senior vice president and advisor for Wealthspire Advisors in Westport, Connecticut.

But, during earnings season, he said, “we’re gong to start hearing more and more about consumer debt and carrying costs of debts. Spending growth is outpacing wage growth, and that’s not sustainable.”

Of the S&P 500 sectors, energy (.SPNY), materials (.SPLRCM) and healthcare (.SPXHC) are expected to have had the biggest declines in earnings year-over-year in the first quarter.

But analysts expect the first quarter to be the smallest increase this year for earnings, with profit growth for all of 2024 seen at 9.8 per cent, based on LSEG data.

“Operating leverage should drive margins further as demand recovers,” BofA Securities strategists noted.