Thomas Lyons 
Investors have been optimistic this earnings season, with consumer spending remaining resilient, big tech companies posting positive results, and corporate executives expressing confidence in the economic outlook. However, the stock market has not reflected this optimism. The sharp rally in US and European equities ahead of results has stretched valuations and set a high bar for further gains. Concerns about a potential recession and higher interest rates have also dampened sentiment. As investors prepare to hear from US industrials, automakers, and retailers for further clues on the health of the consumer, here are four key takeaways from the season so far:
Firstly, the US stock rally leading up to the season was at odds with the trend in the previous three quarters when the market had sold off, according to Morgan Stanley strategists. That has made it difficult for equities to extend their advance amid concerns about a hawkish Federal Reserve and declining earnings. Even as nearly 81% of S&P 500 companies have beaten analysts’ estimates, the median stock has outperformed the index by just 0.1% on the day of results, according to data from Bloomberg Intelligence. In Europe, over 70% of firms have reported better-than-feared profit so far, but a rally in the Stoxx 600 Index has stalled. “While first-quarter results are coming in better than expected, share prices have not rebounded as investors are increasingly concerned about delayed declines in fundamentals as a result of an impending recession,” said chief investment strategist at CFRA Research Sam Stovall.
Secondly, going into the season, analysts were forecasting the steepest drop in quarterly profits for US technology stocks since at least 2006. Early reports show those expectations may have been too pessimistic. Heavyweights Microsoft, Google-owner Alphabet, and Facebook-parent Meta all delivered upbeat results last week, sparking a bounce in the Nasdaq 100 Index and calming worries that a 20% rally in the gauge had gone too far. Amazon also had strong results, although a downbeat outlook fueled a slide in its shares.
Thirdly, the impact of sticky inflation was seen as one of the main risks to earnings in the first quarter. But a range of companies, including Procter & Gamble and Nestlé, have been able to pass on higher prices as consumers prove willing to dip into pandemic-era savings despite slowing economic growth. Mentions of pricing power in news articles are on the rise, while those of cost cuts are dropping, according to data compiled by Bloomberg. With the likes of PepsiCo and Danone expecting demand to remain solid, a Citigroup index shows earnings downgrades are starting to slow. However, not all sectors have been able to sustain higher prices. Tesla has been among the most high-profile companies to announce cuts in recent months as competition in the electric-vehicle market heats up.
Lastly, the chorus of economists warning about a possible US recession has grown following recent turmoil in the banking sector. However, the tone among company executives has been more “balanced” as they “acknowledged rising risks of a downturn but weren’t baking one in explicitly,” according to RBC’s Calvasina. While JPMorgan Chase CEO Jamie Dimon warned about the risks of a contraction in the world’s biggest economy, he said it won’t necessarily happen even if more US regional banks fail. “I’m not surprised that there isn’t yet much broader pessimism about the outlook,” said James Athey, investment director at Abrdn. “The reality is that the job market looks very strong, therefore consumption is for now holding up well and CEOs don’t want to talk down their own stock or the economy.”
In conclusion, while the earnings season has been positive so far, concerns about a potential recession and higher interest rates have capped sentiment. The stock market has not reflected the optimism seen in company results, and investors are increasingly concerned about delayed declines in fundamentals. However, solid results from big tech companies, sustained pricing power, and a lack of recession alarms from corporate executives have provided some reassurance. As the season continues, investors will be closely watching US industrials, automakers, and retailers for further clues on the health of the consumer.
