The considerable gains from Big Tech and the big banks are likely to lead to a surprising increase in corporate profits this earnings season.
S&P 500 index SPX,
Companies are now expected to show positive earnings growth of 1.7% in the fourth quarter, with 58% of the results already achieved. This would allow the index to come out of a earnings recession, which exists when corporate earnings fall year after year for two or more consecutive quarters.
At the end of last year, analysts had expected December quarter earnings to decline 9.3%, which would have marked the fourth consecutive quarter of year-on-year declines. Overall projections started to improve slowly as more results came in and finally turned positive this week.
Helping to fuel momentum, there have been huge gains in the financial services, information technology and communications sectors. As the S&P 500 is weighted by market value, larger companies have a greater impact on the overall profit trajectory of the index.
The financial sector has been the biggest contributor to increased profits, according to FactSet senior earnings analyst John Butters. The sector’s mixed growth rate, which combines real and projected results depending on whether the company has already reported profits, is now 17.2% positive, while the expectation was for a 9.4% drop as of December 13.
Companies that have had significant impacts include JPMorgan Chase & Co. JPM,
which exceeded profit expectations by 44%, while Goldman Sachs Group Inc. GS,
defeated by 62%, Citigroup Inc. C,
defeated by 55%, Morgan Stanley MS,
defeated by 48%, and Capital One Financial Corp. COF,
exceeded estimates by 87%
In the information technology industry, big gains outweigh Apple Inc. AAPL,
Intel Corp. INTC,
and Microsoft Corp. MSFT,
helped boost the sector’s combined growth rate to 15.6%, compared to an expectation of 1.5% in December. Alphabet Inc. GOOG,
GOOGL,
and Facebook Inc. FB,
it also exceeded expectations by a wide margin, raising the combined growth rate for the communications services sector to a positive 6%, compared to a projected drop of 12.9% on December 31.
Out of these three sectors, Amazon.com Inc. AMZN,
and Ford Motor Co. F,
it also delivered big profit surprises, which Butters said it contributed significantly to the growth rate of combined profits.
Boeing Co. BA,
it was the biggest hurdle, as the company reported an adjusted loss of $ 15.25 per share, while analysts expected a loss of $ 1.78 per share. Without Boeing’s results, the combined growth rate for the S&P 500 would be more than double what it is now, Butters wrote.
In all, 81% of the companies that have shown results so far have had profits above expectations, he said.
The following week presents another busy profit agenda, with 77 members of the S&P 500 set to report, including three companies that are on the Dow Jones Industrial Average as well. Walt Disney Co. DIS,
and Cisco Systems Inc. CSCO,
are among the biggest names due to the number of posts.
Here’s what to note:
Stream-lined
Disney is expected to post another quarter on Thursday afternoon, as the pandemic continues to weigh on its theme parks and media businesses, but investors seem willing to look beyond the performance of profits impacted by the company’s pandemic, according to LightShed Partners analyst Richard Greenfield.
The main interest in the Disney report will be the company’s progress with its Disney + streaming service. Disney continues to grow its subscriber base at a rapid pace, but after the company’s latest report, there was some concern about how much of that growth came from those who signed up for the company’s Indian Hotstar product, through which Disney generates a much lower average revenue per user.
Disney earnings forecast: can Disney + maintain its torrid pace to support the Magic Kingdom?
A new chapter for Twitter
Twitter Inc. TWTR,
probably benefited from the same strong advertising trends that helped Pinterest Inc. PINS,
and Facebook at the end of last year, but these results are not as important as what follows.
Twitter executives are likely to face questions on Tuesday afternoon about user engagement trends after the decision to permanently ban former President Donald Trump from the platform due to his role in inciting January violence on U.S. Capitol Hill.
“Regardless of anyone’s opinion of the president or recent political actions on Twitter, we see Trump as a unique driving force for activity and engagement on the platform that will not be easily replaced,” wrote analyst Brian Fitzgerald of Wells Fargo after the ban was announced .
Bernstein analyst Mark Shmulik has hypothesized that while Twitter involvement may be affected, the ban could result in an “increase in the stock of brand safe ads” as some advertisers did not want their ads appear near Trump-related content before the ban.
Opinion: Apple’s privacy changes are affecting more than just Facebook
Networking
The IT spending outlook appears to be improving, which Evercore ISI analyst Amit Daryanani said could generate slightly better than expected results for Cisco when the company publishes the results Tuesday afternoon. He will seek information about the vision of the new CFO, R. Scott Herren, as well as the progress of the company’s efforts to generate more subscription revenue.
Rideshare recovery?
Lyft Inc. LYFT,
and Uber Technologies Inc. UBER,
probably continued on its difficult path to recovery in the fourth quarter, but Shmulik warned that the company’s growth rate in the period may be stable or even slightly below the rate for the third quarter, given an increase in global cases, the emergence of new COVID -19 strains, and winter weather.
Read: Uber’s growth, ‘exciting’ delivery business and possible travel recovery leave analysts optimistic
Lyft reports on Tuesday afternoon, while Uber follows him a day later. Uber executives are likely to discuss the company’s recently announced decision to buy Drizly, an alcohol delivery service.