Wall Street’s lofty profit expectations to test market rally

“Concentration [in the market] has exceeded the dotcom bubble highs, prompting investors to worry about the possibility of a ‘catch down’ from the largest stocks in the index.�

Indeed, for the 10 largest companies on the S&P 500, consensus for the group is to grow sales by 15 per cent and earnings by 32 per cent compared with the same period last year, according to Goldman.

That compares with the remaining 490 firms on the index which are forecast to grow their top line by just 2 per cent and deliver a 4 per cent decline in earnings.

Investors will be closely watching the results of the magnificent seven stocks, particularly given the divergence in share price performance this year. While Nvidia has surged 76 per cent and Meta 47 per cent, Tesla has plunged 30 per cent and Apple has fallen 12 per cent.

The contrasting performance reflects varied outlooks for the tech behemoths. Nvidia’s 2024 earnings estimate has been raised by 20 per cent so far this year while Tesla’s has been slashed by 27 per cent.

Tesla’s underperformance was punctuated last week after it reported a significant miss on its first quarter deliveries. Apple’s growth has also slowed, with its revenue expected to decline by 4 per cent in the first quarter.

AI boom

The pockets of the US sharemarket most exposed to the proliferation of artificial intelligence are still expected to post the fastest sales growth, led by a 239 per cent year-on-year surge by Nvidia. The next-fastest-growing stocks are projected to be Super Micro Computer and Micron Technology.

And Citi still expects the technology sector to produce the most positive surprises. The broker predicted value-oriented sectors like utilities and energy will deliver more negative surprises.

“Positive surprises are expected to be less concentrated among the mega caps, but the smallest size companies are expected to deliver more negative surprises,� Citi’s US equity quantitative research team led by Hong Li wrote in a note to clients.

“If these expectations materialise, it could present an additional challenge to the recent value-rally over the next few months.�

Goldman Sachs noted that companies benefiting from the increasing use of AI were broadening beyond Nvidia as the semiconductor and AI infrastructure sectors were expected to post 27 per cent and 10 per cent sales growth, respectively.

“Management mentions of AI on earnings calls reached a new peak in the fourth quarter,� Mr Kostin said. “Capital spending on AI will undoubtedly be a leading topic of discussion on first quarter earnings calls.�

Investors will also be looking for clues on the health of the US consumer following robust spending and jobs data. Real personal spending increased by 0.4 per cent in February, while non-farm payrolls jumped by 303,000 in March which smashed consensus forecasts of 214,000.

But there are signs of cracks beginning to form, with management of consumer-facing companies signalling signs of weakness. Costco missed consensus sales estimates for February, while Lululemon, Nike and Ulta Beauty all recently disappointed on earnings guidance.

Even so, analysts are still projecting robust first quarter earnings growth across most consumer sub-sectors, with each also expected to post revenue growth in the first quarter, except food, beverage and tobacco.