Earnings reporting season kicks off next week. What investors should expect

Published Wed, Apr 7 20217:35 AM EDTUpdated Wed, Apr 7 20219:17 AM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Key Points

Earnings season gets underway next week when big banks and a few others release first-quarter results.
Q1 earnings for the S&P 500 are expected to have risen 24.2%, according to Refinitiv.
Analysts expect to see large earnings beats, but like last quarter, companies that did well may not see their stocks react on earnings day.

Corporate profits grew at a solid pace in the first quarter, and companies, for the first time in a year, may share some insights into how their businesses will function in a post-pandemic world. The quarterly earnings season kicks off next week with major banks, and a few other names, like Pepsico and Delta Airlines. The quarter's reports will provide the first results that can be compared to another quarter in the Covid era, since the virus began to spread rapidly last March, at the end of the first quarter of 2020. Analysts expect profits for the first quarter to be up 24.2%, according to Refinitv. But earnings for the second quarter are expected to be 54% higher than the second quarter of last year, when the economy was shut down and Americans stayed home. "I think we're actually going to see very much what we saw in the last earning season, which is I think the surprises are going to be outsized again," said Jonathan Golub, chief U.S. equity strategist at Credit Suisse. Golub said earnings beats averaged about 15.5% in the first quarter, well above the usual 3% to 4% level. Profits are expected to be up the most for consumer discretionary stocks in the first quarter, with a 99% gain, followed by a 69% rise for financials and a 47% earnings gain for materials companies, according to Refinitiv. Tech earnings are estimated to be up 24.3%. "I think we're going to see really clear numbers. I think we're going to see, for the first time in a while, I think companies have more clarity. I think the guidance for a lot of companies who have been unwilling to deliver, are going to deliver a really good tone," he said. "I think the change in tone is companies are going to be much more willing to look forward to the reopenings. The population is more vaccinated. We have more clarity." Stocks could respond well to the reports, but there could still be hiccups if companies discuss margin pressures that could impact future earnings. The S & P 500 gained nearly 6% in the first quarter, and 2.5% since then. Golub said the market may react positively, but the earnings news won't lift all stocks. "Last quarter, what you saw was the companies who delivered the best results, they weren't necessarily the ones that outperformed the most. The companies the market wants to reward right now are the companies that are most exposed to the reopening process. Cyclical, industrials, materials, financials. I think their best days are ahead of them," Golub said. While 80% of companies beat earnings estimates in the fourth quarter, only 42% of their stocks rose on the day of earnings, according to Birinyi Associates. Sam Stovall, CFRA chief investment strategist, agrees that the same phenomena of stocks underperforming after earnings beats could persist. The S & P 500 is now trading at 23.2 times the next 12 months' earnings, compared with the 20 year average of 16.8 times, he noted. But Stovall does not expect the overall market to react negatively until after the fist quarter, during which more of the expectations for the second quarter will be priced in. "I think a lot of the Q2 optimism will be put into stocks. It's after Q1 earnings season ... as share prices reflect strong Q1 and even stronger Q2 expectations. But once all of that has been factored in, I think investors will be looking for a further catalyst," Stovall said. Analysts expect financials could be a group that does well this quarter because some banks may be able to release reserves that were taken during the height of the pandemic. JPMorgan Chase, Goldman Sachs, Bank of America , Citigroup and Morgan Stanley , all report next week, among others. "The margins at the banks are going to do very well because there's very few loan losses. The yield curve is steeper," Golub said. Golub said he expects cyclicals, like energy and financials, to see earnings beats. "The real upside surprises we're going to see in those names are going to happen further out in the second and third quarter," said Golub. Some analysts worry that margins could erode profit gains. One of them is Citigroup chief U.S. equities strategist Tobias Levkovich. "We clearly anticipate rising earnings and bottom-up forecasts that show value-related earnings expansion overtaking growth-style numbers in 2Q21, and higher industrial production should sustain better EPS as well," he wrote. But he said that while the market discounts $185 in S & P 500 earnings per share this year, it's possible that margins come under pressure from rising input costs that many businesses may not be able to pass along with rapid enough price increases. Golub said companies complaining about input costs are outweighed in the S & P 500 by companies that benefit from higher commodities prices. "The damage to those companies tends to be small and the benefit to other companies tends to be large,' he said.

Traders work on the floor of the New York Stock Exchange as VIZIO Holding Corp. (NYSE: VZIO) celebrates their Initial Public Opening.

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Corporate profits grew at a solid pace in the first quarter, and companies, for the first time in a year, may share some insights into how their businesses will function in a post-pandemic world.

The quarterly earnings season kicks off next week with major banks, and a few other names, like Pepsico and Delta Airlines. The quarter's reports will provide the first results that can be compared to another quarter in the Covid era, since the virus began to spread rapidly last March, at the end of the first quarter of 2020.

Analysts expect profits for the first quarter to be up 24.2%, according to Refinitv. But earnings for the second quarter are expected to be 54% higher than the second quarter of last year, when the economy was shut down and Americans stayed home.