Wall Street is about to find out whether the next big rally in stocks can be justified
Citigroup, JPMorgan, and Wells Fargo report before the market opens. Alcoa's release traditionally marked the start of earnings season until the aluminum giant split into two public companies last year, pushing its date further out.
The Q1 earnings are the first since the post-election surge in stocks that increased valuations to levels last seen around the 2000 peak of the tech bubble.
"A good Q1 earnings season would likely provide a platform to justify higher prices for stocks in the months ahead," John Stoltzfus, the chief investment strategist at Oppenheimer, said in a note on Monday.
"Earnings, should they surprise to the upside, will add support to current equity market price levels as 'vitamin e' (earnings) reduces P/E multiples if just a tad."
Wall Street has high expectations for earnings. Analysts forecast earnings per share of $29.44, which would be a 9% year-over-year improvement and mark the fourth straight quarter of improving growth, according to Bank of America Merrill Lynch.
Financials and energy lead
The financial and energy sectors are expected to account for the lion's share of earnings growth.
Financials, considered to be major beneficiaries of deregulation and tax reform, were up 26% at the peak of their post-election rally, reflecting investors' expectations for policy under the new administration. However, the sector has since pared that gain to about 18% after the failure of the American Health Care Act, which demonstrated that promised reforms could be delayed or stifled.
Beyond the optimism in the stock market, a rebound in dealmaking compared to the same time last year should also benefit the banks, according to RBC Capital Markets.
"The year-on-year rebound in capital markets activity, net interest margins, and asset prices are benefiting the big-5 banks, insurers, and asset management companies," said Jonathan Golub, the chief equity strategist, in a note on Monday. "By contrast, regional bank earnings remain tepid on uninspiring loan volumes."
RBC Capital MarketsOver in the energy sector, crude oil has regained about 50% on average from its Q1 2016 levels. However, its 6% drop in March - the most in eight months - could mean energy companies report earnings that are lower than they had estimated, said Savita Subramanian, Bank of America Merrill Lynch's head of US equity and quant strategy. Energy earnings estimates have fallen the most among sectors in the past month, she added, as the yellow bars on the chart below show. Bank of America Merrill LynchAnalysts slashed their estimates for energy earnings last month as oil prices fell.The downgraded outlooks for industrials and materials were led by General Electric and Freeport-McMoRan respectively, according to FactSet.Dollar effect
The US dollar index soared to a 14-year high after the November election. When the dollar strengthens, it tends to weaken demand for American goods and hurt the revenues of multinational companies.
The greenback has since fallen from that peak.
"Such moderation could provide support for US multinationals and even encourage an opportunity to repatriate earnings held abroad should the politicos in Washington finally get around to making a deal favoring repatriation," Stoltzfus said.
Additionally, companies with foreign sales are expected to outperform their domestically oriented peers because the outlook for global growth is brightening, RBC's Golub said.
RBC Capital MarketsRetail apocalypse
More than 3,500 stores belonging to chains including Macy's and JCPenney are expected to close this year, as their industry undergoes a structural shift towards ecommerce.
As such, within the retail sector, apparel and department stores are forecast to report earnings declines, unlike industries like online retail and home improvement, according to RBC.
In their holiday-season updates, companies including Kohl's and Target reported disappointing sales. And being an unseasonably warm winter with a record set in February, retailers could whip out the weather excuse for not clearing inventory as quickly as analysts expected.