'Magnificent 7' Expected To Do Heavy Lifting Yet Again For Q1 Earnings, But Will The Other '493' On S&P 500 Fire On All Cylinders? Analyst Weighs In

Resilient corporate profit growth has been one of the major market drivers, and an analyst said on Monday the upcoming first-quarter reporting season could reflect the positive impact of an improving economic environment and continued strength in technology.

Bar Neither High Nor Low: Unlike in the fourth quarter reporting season, when consensus estimates came down by 6.8% between October and December, the picture is different this quarter, said LPL Financial Chief Equity Strategist Jeffrey Buchbinder in his preview.

This time around, the consensus was cut by just 2.5% between January and March, and therefore the bar wasn’t so low, he said.

The analyst sees the typical three to four percentage-point upside to current estimates as achievable, potentially propelling S&P 500 earnings per share growth for the quarter to about 6%.

Positives And Pushbacks: Buchbinder threw in some data points to lend credence to his view that the economic fundamentals were firming up and these include:

• Bloomberg-tracked consensus GDP growth estimate rising from 0.5% to 2% since the start of 2024
• Institute for Supply Management’s manufacturing purchasing managers’ index jumping into expansion territory in March
• Citigroup Economic Surprise Index soaring from -2.4 in January to +39 in April
• green shoots emerging in Europe and China

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The analyst also viewed the sticky inflation as positive for top-line growth, given inflation is pricing power. He estimated that first-quarter revenue may have grown 4% year-over-year, matching the pace seen in the fourth quarter.

Higher crude oil prices and copper prices may have helped the natural resource sector mitigate its earnings decline, Buchbinder said. He sees some offsetting impact coming from the double-digit decline in natural gas prices.

On the other hand, the dollar strength could adversely affect earnings for companies operating worldwide, as the greenback appreciated 3% during the quarter, the analyst said. Other challenges highlighted by the analyst include:

• wage pressures
• cumulative effects of inflation
• rising interest rates on consumers' spending power
• shipping disruptions from the Baltimore bridge collapse
• the increasing difficulty exceeding expectations as the economic cycle matures.

“Putting all of this together, our best guess is about 3% upside and 6% earnings growth,” Buchbinder said.

Big Tech Outperformance: As was seen in the fourth quarter, big techs will again do the heavy lifting, the LPL analyst said. Five of the Magnificent Seven stocks are expected to report earnings growth in the first quarter, driving more than five percentage-point increase in the S&P 500 earnings per share this quarter, he said.

Alphabet, Inc. GOOGL GOOG, Amazon, Inc. AMZN, Microsoft Corp. MSFT, Meta Platforms, Inc. META and Nvidia Corp. NVDA will likely see year-over-year earnings growth, while Apple, Inc. APPL and Tesla, Inc. TSLA are poised to see earnings decline, he said.

“As a group, the Mag 7 are expected to report earnings growth near 40% year over year, while the rest of the S&P 500 — the 493 —  will need to deliver some healthy upside just to match the earnings from the year-ago quarter,” he added.

“But importantly, the point when the ‘493’ will start contributing to overall profits is drawing closer,” the analyst said, referring to the S&P 500 companies sans the Magnificent Seven. 

Buchbinder said he expects “corporate America to produce typical upside relative to expectations in the quarter and deliver S&P 500 earnings growth of around 6%.” “The economic environment and AI investment remain supportive of corporate profits, so downside surprises this earnings season seem unlikely,” the analyst said. Estimate cuts are unlikely, though currency headwinds may temper guidance slightly, he added.

The SPDR S&P 500 ETF Trust SPY, an exchange-traded fund that tracks the broader S&P 500 Index edged down 0.03% to $518.58 in premarket trading on Tuesday, according to Benzinga Pro data. In the first quarter, the ETF rose 9.47%.

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