NEW YORK: Reports from Netflix, Intel and Texas Instruments this week may hint at what is to come in the December quarterly earnings season, with some investors wary of possible danger signs that could knock Wall Street after its latest surge to record highs.
The S&P 500 has gotten off to a strong start in January, up 3 per cent so far this year, fuelled by a truce in the US-China trade war, low interest rates and signs the economy remains healthy.
Analysts on average expect reports to show S&P 500 earnings per share fell 0.8 per cent in the fourth quarter, with technology earnings seen up 0.6 per cent, according to IBES data from Refinitiv.
Investors are looking beyond fourth-quarter results at what companies may say about outlooks and plans for investment in light of the recently signed Phase 1 trade deal between Washington and Beijing.
Earnings estimates for the fourth quarter have already weakened slightly in the latest week as initial reports from big banks and a smattering of other companies filtered in.
“Most of the rally we had in 2019 was in anticipation of better earnings in 2020,” said Willie Delwiche, an investment strategist at Baird in Milwaukee. “Rather than getting caught up in what the Q4 numbers are, the attention will be on what - if any - revisions you get to Q1 and Q2 numbers.”
Analyst estimates for quarterly earnings tend to decline as any given quarter approaches, and any hint that estimates for 2020 are bucking that trend would be positive, Delwiche said.
The S&P information technology index, which includes such market heavyweights as Apple, Intel and Microsoft, has led Wall Street so far in 2020 with a nearly 6 per cent gain. It is up 50 per cent over the past year, the strongest performer over that period. The index is now trading at 22 times expected earnings, its highest multiple since around early 2005, according to Refinitiv’s Datastream.
The S&P 500 is trading at about 18 times expected earnings, similar to levels it briefly hit two years ago.
“There’s going to be heightened attention to guidance to increase comfort levels with valuations, given the strength we’ve seen in the last two months in the majority of tech names,” said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.
Because of that, “you’re more likely to see slight disappointments punished more severely than positive guidance is rewarded,” he added. — Reuters
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