US Earnings Season: week four preview
Wall Street rises despite underwhelming corporate results
The S&P500 continues to rise despite underwhelming corporate results this quarter. In this week's Investor Spotlight, take a pulse check of the US reporting period, preview the week in earnings ahead, and dig into three stocks to watch: Apple, Amazon, and Meta.
Stocks rise despite underwhelming corporate results
Company earnings continue to underwhelm expectations. Despite this, the S&P500 extended its climb last week, supported by an improving macroeconomic backdrop and the unwinding of previously bearish positioning. China's rapid reopening remains a source of hope regarding global demand. Meanwhile, softening inflationary pressures have seen rates markets price in a relatively imminent end to the US Federal Reserve's tightening cycle, along with rate cuts by the end of 2023. The US Federal Reserve will meet this week and is widely expected to raise the Federal Funds Rate by another 25 basis points to 4.75%.
When it comes to fourth-quarter earnings, analysts downgraded aggregate earnings per share growth estimates for S&P 500 companies again last week. The market is now pricing in earnings growth of -5% for the fourth quarter, which is down from the 3.2% estimate prior to the reporting period. Only 69% of companies have exceeded earnings estimates, which is below the historical average of approximately 71%.
S&P500 breaks a key resistance level
The technicals are looking increasingly constructive for the S&P500. Price has broken downward trendline resistance, as the market carves out a series of lower lows. Support appears around the 50-week moving average, with the next level of resistance between 4140 and 4150.
Three stocks to watch this week
The US's largest company will report this week, Thursday after the market closes. As investors focus homes-in on tech, Apple's results will be perused for signals about the sector and the broader US economy. Analysts are forecasting Apple will deliver EPS growth of -7.82% and EPS of $1.94.
The key theme for investors in Apple's quarterly results will be the demand outlook. As the US economy slows, spending on discretionary items is likely to wane, impacting the company's bottom line. Analysts estimate Apple's revenue dropped by 2.22% last quarter. How much China's reopening may fill this demand gap will also be crucial to how investors perceive the outlook for Apple, along with whether it will ease supply-side constraints which China's lockdowns -- amongst other factors -- have put upward pressure on costs.
Currently, the broker community maintains a positive bias toward Apple stocks. Of 41 surveyed analysts, 33 recommend a buy, seven a hold, and one a sell.
Apple’s stock remains in a downtrend, with price carving out a series of lower lows. $US140 is a pivot point for the stock, as price reverts towards the 100 and 200 day moving averages. A break above that level could open a run to the top of the stocks trend channel, while a failure to do so could see a push to the bottom of it.
Amazon will also deliver its quarterly numbers after the bell on Thursday. The company's results will be another barometer for the US economy, especially consumer demand which has, in the official data up until now, displayed remarkable resilience. Amazon's sales growth over recent quarters has trended lower, mostly as consumption normalised after the boom in demand during the early parts of the pandemic.
According to Reuters data, Amazon is forecast to post EPS growth of $0.17 per share. This will mark a 41.26% decline from a year ago. The data suggests that analysts see further slowing in Amazon profits in the quarters to come. Margin pressures are tipped to improve, however, as pandemic-related cost increases moderate or fall.
The broker community remains largely positive on Amazon stock. Amongst 51 analysts, 47 suggest a buy, while three are calling a hold, and one a sell.
When it comes to the technical setup for Amazon, price is testing resistance at around $100 per share. The long-term trend remains to the downside. However, momentum is signalling a possible turnaround.
After a horror 2022, which saw the company lose XX% of its value, Meta's results will be amongst the most highly anticipated of this reporting period. Amidst lower ad-spend, slowing user growth, and increasing competition, analysts are expecting Meta will post EPS of $2.22 per share, a drop of 40% from the year prior.
With a lot of bad news already discounted into the share price, not to mention significant declines in earnings in the quarters ahead, the most important issue for investors as they digest Meta's results will be strategic in nature. Confidence in Meta, and its CEO Mark Zuckerberg, has cratered in recent years, as the company pushes into the "metaverse". Free cash flow has been eaten up by the enormous research and development investment, with a lack of clarity as to how Meta expects to deliver a return on that capital. It's hoped after a year of upheaval, restructuring, and job cuts, a stronger vision for the future will be painted by Meta.
The uncertainty about the company's future is reflected in broker recommendations for Meta stock. 35 surveyed analysts recommend a buy, 19 a hold, and four a sell.
The technicals show a share price clearly in a downtrend, however, short-term momentum has shifted to the upside, with the market approaching technical resistance. Price may find support from an upward-sloping trendline, which if broken could open a test of new lows.
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