US earnings season exceeds expectations

US earnings season exceeds expectations
US earnings season exceeds expectations

Profits reported by 80% of S&P 500 companies for the first quarter amounted to $425.1 billion, 8% more than the $392.8 billion expected.

The profits published by S&P 500 companies for the first quarter surprised in a very positive way. So far, around 80% of the companies in the index have released their results. According to calculations by research firm FactSet, profits reported by these companies for the first quarter amounted to $425.1 billion, or 8% more than the expected $392.8 billion. Positive earnings surprises are normal, but the 8 percent value is significantly higher than the 10-year average of 6.7 percent. Overall, first-quarter profit growth is expected to improve to around 5 percent from a year earlier.

American companies therefore behave better than European companies. STOXX Europe companies that have already published reports totaled a profit of 112.0 billion euros, while analysts expected 107.8 billion euros. In the first quarter, profits of STOXX Europe 600 companies exceeded analysts’ expectations by almost 3.9 percent. This can be considered “normal”: On average, over ten years, the results exceed previous estimates by 3.9 percent. As a result, the expected decline in profits in Europe compared to the results of the previous year should be confirmed. FactSet currently calculates a decline of 7.7%.

We expect growth differences between the Eurozone and the United States to persist for the foreseeable future.

However, American stock markets remain concentrated on a few stocks that move the entire market. The weight of the “Glorious Seven” – Amazon, Alphabet, Microsoft, Apple, Meta, Nvidia and Tesla – is still as important as ever. However, the fundamental picture within this group of stocks is more differentiated than recently. Amazon, Alphabet and Microsoft notably presented convincing figures. Semiconductor manufacturer Nvidia, which produces the main raw material for digitalization and artificial intelligence, will present its figures on May 22. Quarterly reports from major tech groups confirm our view that digitalization and artificial intelligence are strong trends that could play an important role on stock markets in the years to come. However, it is appropriate to qualify this general statement.

This is shown in particular by the case of Meta. The operator of Facebook, WhatsApp and Instagram has undoubtedly presented good financial results. Revenue for the first quarter was $36.5 billion, an increase of 27% compared to the first quarter of 2023, and quarterly profit reached $12.4 billion. But at the same time, Chairman of the Board Mark Zuckerberg announced that he wanted to invest $35 to $40 billion this year alone, mainly in artificial intelligence. In this way, Meta is to become the world’s leading company in this field. But before Meta achieves this goal, significant investments will weigh on Meta’s free cash flow in the coming years. Capital expenditures, including lease repayments, totaled $6.7 billion in the first quarter, driven by investments in servers, data centers and network infrastructure.

This proves once again that investors cannot buy trends, in the end they must always decide on concrete actions. A trend can be as strong as possible, if the investor does not have the right stocks in his portfolio, he will not benefit from this trend. This is why, from our point of view, a critical selection of actions, based on clear criteria, is essential. Many companies will need to invest in artificial intelligence in the coming years. It is therefore necessary to identify those which will manage to make the leap into this new era at a reasonable cost. The good news is that these companies exist on the stock market. You just have to find them.

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