Interactive Investor

US results season preview: catching up with the Magnificent 7

It’s the big tech stocks that have grabbed headlines during recent earnings seasons, but others may get a turn this time. Here’s what’s expected from these second-quarter company results.

10th July 2024 16:01

by Graeme Evans from interactive investor

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The other 493 companies of the S&P 500 index are in the results spotlight as Wall Street looks for broader growth outside of just NVIDIA Corp (NASDAQ:NVDA) and the rest of the Magnificent Seven.

Fuelled by its 80% share of the rapidly expanding market for AI chips, the $3 trillion-valued Nvidia has accounted for roughly 35% of this year’s gains by the S&P 500.

The benchmark’s run of 36 all-time highs so far this year has left the index on a forward 12-month price/earnings ratio of 21.2 times, well above the 10-year average of 17.9 times.

This year’s rally has intensified fears about the risks attached to a US equity market that has such a high-level concentration on a handful of leading companies.

The second-quarter results season, which gets under way with PepsiCo Inc (NASDAQ:PEP) tomorrow, will offer a chance for the rest of the market to show that it can diversify the market performance.

Bank of America expects Wall Street’s other 493 companies to post their first quarter of earnings growth since the final three months of 2022. In contrast, Magnificent Seven growth is forecast to have slowed in the second quarter and will do so again in the current one.

The bank said: “Growth is broadening out and so should the market.”

The Wall Street consensus points to overall earnings growth of about 9% against an easier comparative of minus 6% a year earlier. “We expect a 2% beat, in line with the historical average and the smallest since the fourth quarter of 2022,” the bank added.

The financial sector will be the main focus for the market during the next two weeks, accounting for over 40% of the S&P 500 companies due to report in that period.

Financial data firm FactSet expects the sector to deliver growth of 4.3%, but with this performance held back by an expected decline of 10% in the banking industry.

This reflects a significant boost on the previous year as net interest income - the difference between what a bank earns in interest on loans and what it pays out in interest on deposits - benefited from the unprecedented run of Federal Reserve interest rate hikes.

Bad debt provisions and the need to pay more for deposits have squeezed profitability, offset by a return upturn in the net interest margin cycle and in merger activity.

Shares in the US bellwether JPMorgan Chase & Co (NYSE:JPM), which reports figures on Friday, are about 20% higher so far this year and The Goldman Sachs Group Inc (NYSE:GS), which reports on Monday, up 9%.

Other confirmed dates in the US results calendar include Netflix Inc (NASDAQ:NFLX) on 18 July, followed by Tesla Inc (NASDAQ:TSLA) and Alphabet Inc Class A (NASDAQ:GOOGL) on 23 July, ARM Holdings ADR (NASDAQ:ARM) and Meta Platforms Inc Class A (NASDAQ:META) on 31 July and Apple Inc (NASDAQ:AAPL) on 1 August.

UBS Global Wealth Management warns that a less-than-perfect earnings season could lead to market corrections in the short term.

It said today: “We continue to see a positive backdrop for US equities amid a still-healthy growth environment, the Fed’s potential pivot to rate cuts, and ongoing investment in artificial intelligence.

“While we think the upcoming earnings season has the potential to support the current equity rally and even broaden it, an outcome that falls short of investors’ high hopes could lead to a return in volatility.”

It adds that the key focus for the technology sector will be on AI monetisation and the sustainability of strong capital spending trends in 2025 and beyond.

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