Investors Shrug Off Weak Earnings Reports as Stocks Rebound to Start Year

So far this reporting season, shares of companies in the S&P 500 that have missed Wall Street’s earnings expectations have slipped 0.3% on average in the two days before their report through the two days after, according to FactSet. That compares with the five-year average of a 2.2% decline.

“The market has been all about forgiveness through the early part of the earnings season,” said

Yung-Yu Ma,

chief investment strategist at BMO Wealth Management.

The stakes increase this week as investors navigate one of the busiest periods of the reporting season. Meta Platforms Inc. appears poised to follow the trend, with shares jumping in postmarket trading Wednesday even after the Facebook parent company reported a smaller-than-expected profit.

Apple Inc.,

AAPL 0.79%

Google parent

Alphabet Inc.

GOOG 1.56%

and

Amazon.com Inc.

AMZN 1.96%

are on deck to announce results Thursday. In all, more than 100 companies accounting for nearly a third of the S&P 500’s market value are scheduled to release earnings this week.

Coming off the worst year for U.S. stocks since the 2008 financial crisis, investors are eager to wager inflation will soon tumble and the Fed will cut interest rates this year—though central-bank officials have repeatedly said their work to cool the economy isn’t done. Stocks rallied Wednesday after the Fed raised interest rates by a widely expected quarter percentage point, bringing the S&P 500’s year-to-date gains to 7.3%.

Early earnings reports tell a different story and suggest many companies are bracing for economic turmoil. Banks have stowed away billions of dollars in case clients fall behind on loans; consumer-products makers have warned they can’t keep raising prices to keep up with elevated costs, and technology companies have laid off workers en masse.

“I still think the story is about the Fed,” said

Leslie Thompson,

chief investment officer of Spectrum Wealth Management. She expects the trajectory of interest rates to be the primary driver of market action in 2023 and is “cautiously optimistic” about stocks this year as she believes inflation is moderating.

Some investors remain skeptical of stocks’ recent rebound and are viewing the rally as temporary relief in a continuing market downturn.

“There seems to be some disconnect between the market’s strong rally and what’s really happening with these companies’ earnings and guidance,” said

Jimmy Chang,

chief investment officer at Rockefeller Global Family Office. His firm remains underweight in equity allocation and favors defensive, blue-chip stocks, he said.

Fewer companies than usual are beating Wall Street’s earnings expectations as well. With about 38% of companies in the S&P 500 having reported fourth-quarter results, 70% have topped analysts’ consensus earnings estimates, according to FactSet. That is below the five-year average of 77%.

The disappointing reports come even after analysts sharply cut their expectations for fourth-quarter earnings over the past several months. Companies in the S&P 500 are set to report a 4.9% decline in profit, according to a blend of actual results and estimates for those yet to report, versus the consensus expectation of a 9% gain at the end of June. That would mark the first quarterly earnings decline since the depths of the Covid-19 pandemic in 2020.

Companies are also issuing weaker guidance for the current quarter. Of the 33 companies in the index that have forecast first-quarter earnings, 88% have offered guidance below consensus expectations, according to FactSet. That compares with the five-year average of 59%.

Intel Corp.

INTC 2.87%

, for example, reported a loss for the fourth quarter and issued a gloomy outlook for the first quarter amid weakening demand for chips. The company forecast $10.5 billion to $11.5 billion in sales, well below Wall Street’s projection of $13.9 billion.

Though Wall Street expects S&P 500 profits to continue contracting in the first and second quarters, analysts still forecast growth in the second half with earnings projected to rise roughly 3% overall in 2023.

Those estimates appear too rosy to Mr. Chang, who says he expects a recession to squeeze corporate results this year. He believes analysts will have to cut earnings estimates down the line.

“There’s that fear of missing out. There’s always this expectation that perhaps things will work out better than expected,” he said. “But I’m not buying into the Street’s narrative that has been driving the equity rally.”

Write to Hannah Miao at [email protected]