With first-quarter earnings reports imminent, the biggest battle against inflation for companies and their customers may be over. Smaller challenges may just be beginning.

Performance will give us a fuller picture of what 2024 will be like, as at least some of the factors that have pushed home prices higher or kept them moving higher over the past three years are likely to be there.

In 2021, there was the period of economic reopening after the pandemic and supply chain crises. In 2022, the Russian-Ukrainian conflict broke out. In 2023, as the Federal Reserve raised interest rates to control price increases, consumers could no longer afford the rise in the prices of basic necessities, and people began to wonder if companies had taken advantage of three years of turmoil to raise prices.

Matt Stucky, chief equity portfolio manager at Northwestern Mutual Wealth Management, said these historic disruptions may actually be just part of the Fed’s uphill battle against high inflation. “Now we’re getting into the hard part,” he said.

Stucky believes that strong employment trends and wage growth have kept high prices and interest rates stable, but as this trend stabilizes, consumer caution and expectations of an eventual economic slowdown will also remain. March's amazing employment data continues to shock skeptics, while others believe that the United States is beginning to accept the current situation as the new normal.

“The fact that the labor market is so strong suggests that companies and the economy are adjusting to higher interest rates,” Glen Smith, chief investment officer at GDS Wealth Management, said in emailed comments last week.

Delta Air Lines DAL.N and JPMorgan Chase & Co JPM.N are set to report quarterly earnings this week. Overall, Wall Street expects U.S. corporate profits to remain modest as companies keep raising prices and cutting costs to boost profits even as consumer demand remains.

But first-quarter results will likely resemble those of the fourth quarter of last year. Even as the market rebounds, there are signs of deeper pessimism among corporate executives. The plight of low-income consumers, rising delinquencies on bills and deep cracks in commercial real estate remain concerns.

Growth in the big tech sector may continue to save the overall market, but investments in artificial intelligence and antitrust actions may take years to bear fruit, testing investors’ patience amid the debate over whether the AI ??boom is really another tech bubble.

"As with the previous two quarters, the technology sector remains a key growth driver in the first quarter of 2024," Zacks Research Director Sheraz Mian wrote last month. "If not for the strong earnings growth in the technology sector, total returns for the rest of the index would have moved slightly into negative territory."

Wall Street analysts on average expect S&P 500 companies to report first-quarter earnings per share growth of 3.2%, according to FactSet. That’s down from the 5.7% growth rate predicted in late December.

They also expect first-quarter profit margins of 11.5%, according to FactSet. That would be higher than the 11.2% in the previous quarter as some U.S. companies maintained profits by cutting costs and laying off workers.

Analysts typically lower their expectations as companies approach earnings dates, but John Butters, senior earnings analyst at FactSet, noted that analysts’ forecast revisions have been below average, in contrast to the companies’ own expectations.

"While analyst estimate revisions for S&P 500 companies' first quarter earnings have been smaller than recent averages, companies are more pessimistic about their first quarter earnings outlook than recent averages," he said in a note late last month. "As a result, S&P 500 earnings estimates are now lower than they were at the beginning of the quarter," he added.

Seventy-nine companies in the S&P 500 issued pessimistic profit forecasts. That's the second-highest level since the second quarter of 2019, when 33 forecasts were positive, according to FactSet.

This week's earnings focus

Outside of banks, Wall Street will be watching results from Delta Air Lines, which reports on Wednesday. Bank of America Merrill Lynch analyst Andrew Didora said in a research note Thursday that he will be watching summer demand, corporate travel trends and fuel prices.

Analysts at Morgan Stanley said Delta Air Lines entered its first-quarter earnings season with unusually high expectations due to its multi-year recovery from the pandemic.

“All eyes will be on the resilience of the booking curve for the summer, both domestically and transatlantic, especially in the face of very tough compares,” they said. “Progress by companies will also need to be evident.”

One thing that can't be ignored JPMorgan Chase, Jamie Dimon: When JPMorgan Chase & Co. reports first-quarter results on Friday, Wall Street will be focused on CEO Jamie Dimon's views on the broader economy. As noted in MarketWatch's bank earnings preview story, the first quarter saw an increase in trading activity, but expectations for interest rate cuts have faded, which could stimulate the economy to some extent by making it easier to borrow money but would eat into banks' profits.

While JPMorgan is seen as a barometer of the economy, it is much larger and more diversified than its regional rivals. That means it is more solidly built than other tremors in the banking industry.

The article is forwarded from: Jinshi Data