Wall St Week Ahead The stakes are high as megacap companies highlight large revenue weeks

People are seen on Wall Street outside the New York Stock Exchange (NYSE) in New York City, USA, March 19, 2021. REUTERS / Brendan McDermid / File Photo

NEW YORK, April 22 (Reuters) – Investors hope a flood of US quarterly reports next week, including those from megacap growth titans, will confirm solid corporate earnings prospects and strengthen the stock market after a difficult start to the year.

Almost 180 companies in the S&P 500, worth about half of the benchmark’s market value, will report results next week. They include the four largest US companies by market value: Apple (AAPL.O), Microsoft (MSFT.O), Amazon (AMZN.O) and the Google moral alphabet (GOOGL.O).

The latest round of earnings comes amid a backdrop of hawkishness from the Federal Reserve and a rapid rise in bond yields that has sparked concerns about whether politicians will hurt the economy as they fight the worst inflation in nearly four decades. The S&P 500 has moved lower in April and was down 10.4% so far this year after strong sales on Friday. read more

With monetary policy weighing on equities, bullish investors expect solid business prospects to support markets, increasing pressure on companies to report solid results and bottom-line forecasts. S&P 500 companies are estimated to increase earnings by 9% this year, according to Refinitiv IBES.

“It’s probably the strongest argument you can make for owning stocks at this point, that the company’s profits are still very robust,” said Charlie Ryan, portfolio manager at Evercore Wealth Management. “Any deterioration in the company’s profit growth and the pace of it would scare the market.”

So far, investors have been quick to punish stocks in companies with disappointing results, especially those with expensive valuations. A recent crash has been Netflix (NFLX.O), whose shares fell around 35% in a single session after the streaming giant reported its first drop in subscribers in a decade.

Although shares have fallen so far this year, the S&P 500 has continued to trade at approximately 19 times the forward earnings estimate, above the long-term average of 15.5 times.

“We are in a show-me environment. I think next week is critical for technology names and high-growth names, especially higher-value stocks,” said Anthony Saglimbene, global market strategist at Ameriprise. “They have to prove they deserve these multiples right now.”

Investors will reset results from Apple, Microsoft, Amazon and Alphabet, which together have a market value of around 8 trillion dollars and make up a fifth of the weight of the S&P 500. All these megacap shares have fallen this year, with Apple falling around 9% , Amazon fell 13.4%, Alphabet fell 17.4% and Microsoft fell 18.5%.

Earnings expectations for these companies have been subdued for the quarter ended in March. Microsoft is expected to have increased adjusted earnings per share by 12% from the same period last year, Apple by 2%, while Alphabet is seen with a decline of 0.7% and Amazon reports a fall of 49%, according to Refinitiv data. In total, S&P 500 companies are expected to increase their quarterly result by 7.3%.

“Expectations are low, but that does not mean it is not important,” said James Ragan, director of asset management research at DA Davidson. “If we are to reach the 9% (earnings growth) for the year or even better than that, it is difficult to imagine that we will do so without having better than expected earnings from the megacap companies.”

Apart from the four best companies, results next week come from a number of companies, including Facebook owner Meta Platforms (FB.O), the payment companies Visa (VN) and Mastercard (MA.N), the oil companies Chevron (CVX.N) and Exxon Mobil (XOM.N), and the consumer companies Coca-Cola (KO.N) and Pepsico (PEP.O).

In addition to bottom-line results and economic prospects, investors will also look at whether companies can maintain their profit margins as inflation threatens to increase their investment costs. S&P 500 companies should see net income margins fall to around 13% in 2022 from a record high of 13.4% last year, JPMorgan said in a note this week.

Of the 99 S&P 500 companies that have reported so far, 77.8% reported earnings above analysts’ expectations, Refinitiv IBES said. This frequency is above the typical rate of 66% for a quarter since 1994, but below 83% in the last four quarters.

“The stock market … is waiting for this tangle of earnings,” Saglimbene said. The market is “monitored to what companies say about the second quarter and beyond.”

Reporting by Lewis Krauskopf; Edited by Ira Iosebashvili and Chris Reese

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