To The Moon

Abstract: Companies on the $S&P 500(.SPX)$ are expected to report their weakest profit growth in nearly three years.

This week, the US stock market's earnings season gained much anticipation. Due to factors such as weak performance, technology sector’s return to fundamentals, high risks of financial institution, and increased corporate debt, market participants are generally bearish about the US stocks.

Companies of the $S&P 500(.SPX)$ are expected to report a 6.8% decline in earnings per share in the first quarter, the largest drop since the second quarter of 2020.

The latest data from FactSet shows that

analysts expect earnings to decline 4.6% in the second quarter and then grow again in the third quarter (+2.1%) and fourth quarter (+9%).

Of course, these optimistic predictions for the second half may change depending on how the economy unfolds.

As usual, there are significant differences in growth between different industries.

1. Top 3 sectors: consumer discretionary, industrial and finance

1) In the first quarter, consumer discretionary is expected to grow by 34%, the best among all industries so far this year.

This is also the case for the entire year. Earnings for the consumer discretionary are expected to grow by nearly 26%, higher than any other industry.

The top holdings of $Consumer Discretionary Select Sector SPDR Fund(XLY)$ include $Amazon.com(AMZN)$ , $Tesla Motors(TSLA)$ , $Home Depot(HD)$ , $Nike(NKE)$ , and $McDonald's(MCD)$.

Amazon alone accounts for nearly a quarter of the ETF, and its earnings per share are expected to double this year.

2) After consumer discretionary, the strongest earnings growth in the first quarter is expected to come from industrial (+12.6%) and energy (+9.2%) sectors.

For industrial stocks, this strength will continue throughout the year, with full-year profits expected to grow by 11.1%. However, the outlook for the energy sector is not as good, with earnings expected to decline by 21.5% for the year. $WTI Crude Oil - main 2305(CLmain)$ $Brent Last Day Financial - main 2306(BZmain)$ $Energy Select Sector SPDR Fund(XLE)$

After soaring in 2022, energy prices are expected to cool in 2023, although the recently announced OPEC production cuts have pushed oil prices away from this year's lows.

3) Interestingly, despite the turmoil in the regional banking sector seen in March, earnings in the financial sector are expected to grow strongly.

Analysts predict growth of 2.4% in the first quarter and 10.5% for the full year.

However, analysts have just begun to lower their profit forecasts for banks, so these numbers may decline. It can be said that there is a lot of uncertainty in the profit prospects, especially in this industry.

Large banks will kick off the earnings season this Friday, with $JPMorgan Chase(JPM)$ , $Citigroup(C)$ , and $Wells Fargo(WFC)$ expected to release their reports on that day.

2. Are profits still important? Why stock price and profits are disconnected?

Profit is the lifeblood of the stock market.

However, this relationship is not always true in the short term. The amount investors are willing to pay for a certain amount of returns may fluctuate significantly for various reasons, and their changes often outweigh the changes in profits.

For example,

this year, technology stocks are one of the best performing sectors in the stock market, with $Technology Select Sector SPDR Fund(XLK)$ rising by 20%. However, earnings for the tech sector are expected to decline by 0.4% by 2023.

Another example is that Industrial companies' profits are expected to grow by around 11%, but $Industrial Select Sector SPDR Fund(XLI)$ is up just 0.6%, underperforming the broader market.

There are many reasons why stock performance may be out of step with earnings growth in the near term:

• Perhaps growth is already reflected in prices;

• or investors don't expect growth to last;

• or they just aren't willing to pay for it due to a variety of factors.

In the case of high-growth technology stocks, declining long-term interest rates have pushed up the value of future earnings, increasing the P/E ratios investors are willing to assign to these companies.

In the long run, the ultimate driving force behind stock prices is profit.

For an overview of sector and earnings performance in 2023, see the following table:

Data source: *FactSet estimates and ETF.com