Stocks Await More Earnings After Strong Start And Better Inflation – Forbes

Within the S&P 500, 20 companies reported earnings last week, dominated by large bank earnings. 79% of S&P 500 firms reported better-than-expected earnings for the quarter. The pace of the third-quarter earnings season picks up this week, with 40 S&P 500 companies scheduled to report.

Better bank earnings and friendly inflation readings sent bond yields lower and stocks higher. The S&P 500 rose 2.9% for the week, and the Magnificent 7 gained 2.0%. The Magnificent 7 consists of Microsoft (MSFT), Meta Platforms (META), Amazon.com (AMZN), Apple (AAPL), NVIDIA (NVDA), Alphabet (GOOGL), and Tesla (TSLA). Notably, bank stocks soared 8.2% on the back of better earnings.

While headline consumer inflation (CPI) rose to 2.9% year-over-year, there was better news beneath the surface. The rate of services inflation continued to decelerate. If this easing in services prices continues, combined with the likely deceleration in housing costs, the headline inflation rate should begin to moderate again.

Until relief came last week, rising bond yields had begun to weigh on stock prices. The 10-year U.S. Treasury yield had approached 4.8% on January 14 after being as low as 3.6% in mid-September 2024. Interestingly, the rise in yields has been primarily due to the increase in real (after-inflation expectations) yield rather than increasing inflation expectations. The better details within last week’s inflation reading sent the 10-year Treasury yield down to 4.6%.

Banks make up a sizable portion of this week’s earnings reporters, but other companies reporting are 3M (MMM), Netflix (NFLX), Procter & Gamble (PG), and Johnson & Johnson (JNJ).

The financial sector contributed most significantly to last week’s earnings growth improvement. According to FactSet data, JPMorgan Chase (JPM), Goldman Sachs (GS), Morgan Stanley (MS), and Bank of America (BAC) were the most significant contributors to the increase in earnings for the financial sector, which rose to 47.5% from 39.3%. Generally speaking, loan growth remained modest for the banks in the fourth quarter, but capital markets activity significantly boosted earnings.

The financial sector is expected to show the most rapid year-over-year growth rate in the S&P 500, followed by the powerful technology and communications services duo. Bringing up the rear is the energy sector, with a forecasted almost thirty percent decline in year-over-year earnings.

Because these companies are a critical driver of earnings growth and a significant percentage of the S&P 500’s market capitalization, the Magnificent 7 are again the group to watch this earnings season. According to FactSet, the Magnificent 7’s earnings are expected to grow by 21.7% year-over-year versus 9.7% for the rest of the S&P 500. The Magnificent 7 earnings aren’t scheduled to begin until the week of January 27.

The significant decline in oil prices year-over-year should result in the expected earnings decline for the energy sector and weigh on materials.

The strengthening of the U.S. dollar in the fourth quarter will likely depress international earnings growth at the margin.

Sales growth is closely tied to nominal GDP growth, which combines after-inflation economic growth (real GDP) with inflation. At this point in the earnings season, sales growth at 4.7% has slightly exceeded expectations, with the tailwind from an estimated 5% year-over-year nominal GDP growth.

Sales growth is expected to be the most robust in the technology sector, with the energy sector predicted to show a decline in year-over-year revenue due to lower oil prices.

Primarily due to the robust earnings growth for the banks, the blended earnings performance has outperformed expectations at the end of the quarter. Combining actual results with consensus estimates for companies yet to report, the blended earnings growth rate for the quarter is at +12.5% year-over-year, above the expectation of +11.9% at the end of the quarter.

With few meaningful economic releases this week, markets are likely to be dominated by earnings and politics. President Donald Trump’s inauguration on Monday could unleash a wave of policy announcements, which could lead to some volatility in the impacted sectors.

While the banks provided a solid start to the earnings season, this week’s reporters should give a glimpse into additional sectors and a strong dose of additional banks. Forward earnings guidance for 2025 will be watched closely as double-digit profit growth expectations are baked into consensus estimates.