Yahoo Finance What recession? Investors eye 'companies that can thrive' amid slowdown
More than a quarter of S&P 500 companies are reporting earnings this week, offering investors a clearer snapshot of Corporate America's health amid a tightening credit environment and growing recession concerns.
So far, it's not as bad as Wall Street had feared. Entering the final week of April, S&P 500 companies' earnings were 5.8% above estimates.
“Even in a slowdown, there's companies that can thrive,” Michael Antonelli, a strategist at Baird, told Yahoo Finance Live (video above). “There's companies that can find pockets to really excel in and kind of push...their agenda forward. So I do think there are still growth companies to be had around.”
He named energy as one sector investors should look at. "Industrials, same thing," he said. "If you were to look at, say, a big Midwestern industrial or, you know, an ag-focused industrial, they're still doing really well. Their charts still look really good, and now their earnings are showing up as being quite strong."
The big question, though, is whether tech earnings will deliver. After a down year in 2022, the Nasdaq Composite has risen nearly 15% year-to-date, roughly double the returns of the S&P 500.
The drivers of those gains are now set to reveal how they performed in the first three months of 2023.
On Tuesday, Microsoft (MSFT) and Alphabet (GOOGL) will provide updates on their closely watched A.I. strategies and cloud platforms. On Wednesday, Meta (META) will provide new insights into the ‘year of efficiency.' Meanwhile, Thursday brings the first look at the financials of Amazon (AMZN) since CEO Andy Jassy warned of ‘short-term, headwinds’ at AWS.
“With these stocks all beating the S&P 500 by a wide margin (year-to-date), the expectations bar is set quite high,” Nicholas Colas, co-founder of DataTrek Research, wrote in a note to clients on Monday. “Not only must these companies beat, but they must also guide to a reaccelerating of (earnings per share) growth in Q2 2023 and beyond. That’s what the Street is looking for and is the key catalyst behind this group’s remarkable resurgence in 2023.”
These four aforementioned tech titans make up more than 10% of the S&P 500, which is pacing below normal profit levels thus far this earnings season.
While S&P 500 companies have delivered a 5.8% earnings beat so far, that's still below the 5-year and 10-year averages for estimate beats. If the quarterly net profit margin holds at the current 11.2%, it will mark the seventh-straight quarter of a quarterly decline, according to FactSet.
Accordingly, analysts have slashed their forward-looking earnings projections. The Street has cut second through fourth quarter 2023 estimates in a range of 0.6%-0.9%, according to DataTrek Research. First-quarter 2024 results have been trimmed by 1.1%, too.
Colas and DataTrek note the cuts are “logical, overdue, and very likely to continue.” Still, markets aren’t reacting in line with the cuts. The S&P 500 is up about 0.59%.
“The good news is that markets are OK with analysts cutting estimates since no one really believes them anyway.”
The week ahead also brings a closer look at the economy with the initial reading for gross-domestic product growth in the first quarter expected on Thursday. The measure is a closely watched recession indicator.
Economists surveyed by Bloomberg predict the U.S. economy grew by 2% in the first quarter. Thursday's GDP report comes amid conflicting data on whether the economy is growing or contracting.
Some on the Street argue a recession is already so highly anticipated it may not matter.
“The good news is everyone is talking about the bad news,” Savita Subramanian, a strategist at Bank of America Global Research wrote in a note to clients on Monday.
“News trends and recession likelihood barometers are at levels only seen during actual recessions. And even if a recession is imminent, the Fed has latitude to soſten the impact aſter pushing rates up by 5%. And aſter the fastest hiking cycle ever, the only thing to 'break' so far is SVB.”
Josh is a reporter for Yahoo Finance.
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