High expectations provide a tough test of profitability on Wall Street


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Strong expectations for U.S. corporate profits mean the flurry of financial reports due in the next two days will play a key role in shaping the direction of Wall Street stocks, investors say, after a rocky start to 2025.

The S&P 500 had its best week since the November US election last week, helped by strong numbers from major banks, pushing the index into the dark of January.

But investors say a strong showing is needed from many household names – totaling $25tn – due to the report at the end of January, if the market is to surpass the record it hit last month.

Analysts are predicting the best quarterly results in three years, with profits for S&P 500 companies expected to rise 11.4% annually, according to FactSet.

List it has increased by 23 percent over the past year as demand for stocks related to artificial intelligence benefits technology companies. That put the S&P at a price/earnings ratio of 21 times, according to data from LSEG.

“The market cannot rely on multiple expansions to add value because of (their) growth rate already in 2024,” said Jurrien Timmer, global head of Fidelity Investments.

“This puts more weight on earnings to be the catalyst for the market’s recovery,” he added, pointing to the pressure of higher interest rates.

On average, a bad January for stocks results in an average return of 2.5 percent for the entire year, according to Barclays analysts. An opening month with gains of less than 1.5 percent, however, tends to yield annual gains of more than 11 percent.

After noting a record high in 2024, stocks have stumbled in recent weeks, weighed down by concerns about the potential for higher interest rates to hurt economic growth and uncertainty over the early steps of the Trump administration.

Companies including Netflix, GE and consumer group Procter & Gamble are among those expected to make statements this week. Tech giants including Amazon, Microsoft, Facebook parent Meta and Tesla are due next week.

Major growth is expected to come from the technology sector, including called the Magnificent Sevenbut investors are also looking for signs of increased profitability among other groups in the hope that this will reduce the reliance of the S&P 500 on minority stocks.

The earnings of the Big Seven – Apple, Microsoft, Alphabet, Amazon, Tesla, Meta and Nvidia – are expected to rise by 21% this year, down from 33% in 2024, according to FactSet. Income growth for the other 493 stocks in the index is expected to rise to 13 percent, up from 4 percent.

Market participants will also be paying close attention to the administration’s views on incoming President Donald Trump, whose market gains since winning the November election have centered on expectations of deregulation and tax cuts.

Concerns about Trump’s actions have also led to strong revisions to his earnings, if the president moves quickly on his tariff threats, which could hurt international sentiment.

About 30 percent of S&P 500 companies’ revenue is generated outside the U.S., and a 10 percent increase means a 3 percent hit to a company’s earnings per share.

“The difference in growth rates between the Magnificent Seven and the rest of the market is important, but I’m very interested in the company’s guidance on business issues since the election,” said Kevin Gordon, the company’s chief economist. Charles Schwab.

“We can see a discrepancy between the spirits of cotton and the numbers that would have been disappointing in the previous quarter. I would not put my hat on the idea that the withdrawal (under Trump) will be a big growth issue,” he added.

Additional reporting by Ray Douglas


2025-01-18 12:00:32
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