Earning season is about to get underway and that could be a positive catalyst for stocks

Market Insider

A man wearing a protective face mask walks by 14 Wall Street in the financial district of New York, November 19, 2020.
Shannon Stapleton | Reuters

The earnings reporting season gets underway in the week ahead, and it is expected to be a positive catalyst that could continue to send stocks higher for now.

The week is also packed with Federal Reserve speakers and important data, including a much anticipated inflation reading Tuesday when the consumer price index is released. Fed Chairman Jerome Powell kicks off another busy week for Fed appearances with a Sunday evening interview on “60 Minutes.”

Powell, in comments this past week, continued to reinforce that the Fed will keep its easy policies in place for a long time, and that any emergence of inflation should be temporary. But hotter-than-expected producer price inflation data Friday has made the consumer price index release Tuesday all the more important. PPI gained 1%, double the expected increase.

Kevin Cummins, U.S. economist at NatWest Markets, said he expects core CPI to rise 0.2% for March, or 1.5% year-over-year, but headline inflation should reach 0.5% or 2.5% year-over-year. Cummins said March is the beginning of a period where inflation could appear greater, just because of the comparison to low levels last year when the economy was shut down.

“I think the Fed has already moved ahead of it,” Cummins said. He said he expects CPI to peak at 3.6% in May but then calm down during the summer.

The other key piece of data in the coming week is the retail sales report for March, which Cummins said could show a 10% gain.

Cummins said the March sales should be boosted by the $1,400 stimulus checks sent to individuals, which started reaching bank accounts in mid-March. More of the economy has also been opening up, as more people get vaccinated.

“The back end of the month should be very strong,” he said. “If you look at auto sales, that was the highest level in four years. It seems like restaurants are getting more crowded, with outdoor seating.”

Earnings season

But it may be the earnings season that is the real tell for the economy.

‘It isn’t what they report,” said James Paulsen, chief investment strategist at Leuthold Group. “For the first time, we are going to hear more and more companies now actually making comments about the future. Are they going to upwardly revise some of their outlooks or are they note? That’s what’s really going to be key about it.”

The big banks kick off the reporting Wednesday, with JPMorgan, Goldman Sachs and Wells Fargo. Bank of America and Citigroup report Thursday. Morgan Stanley reports Friday. PepsiCo and Delta Airlines are also among the first to report.

“The consensus for the first quarter is are supposed to be up roughly 22%. We have an easy comp from last year. That number could be closer to 30%,” said Brian Rauscher, head of global portfolio strategy at Fundstrat.

Rauscher said he expects the most earnings beats to be in the cyclical sectors, like consumer discretionary, financials and materials, all sectors that benefit from the reopening economy.

“I think earnings season is going to be constructive, and it’s going to be good enough to keep the market going higher,” he said.

Based on estimates and early reports, Refinitiv now expects earnings growth of 25% for the first quarter. Companies have been beating estimates so far at a pace of 81%. Earnings for the financial sector are expected to be up 75%. The consumer discretionary sector was hit hard by shutdowns a year ago, and its earnings are expected to bounce back by 98%, according to Refinitiv.

“I think what we’re going to start to see is the operating leverage for these companies is really underappreciated. The earnings are going to start to come back faster than the revenues,” said Rauscher. “Corporate America has really done a good job in the last year of streamlining their operations, their cost structures and everything else. Revenues could come back 50%, and earnings could come back 100%.”

The major stock market indices were higher in the past week, but small caps lagged with the Russell 2000 losing ground.

Week ahead calendar

Monday

1:00 p.m. Boston Fed President Eric Rosengren

2:00 p.m. Federal budget 

Tuesday

Earnings: Fastenal 

6:00 a.m. NFIB small business survey

8:30 a.m. CPI

12:00 p.m. Fed panel on race and economy – Atlanta Fed President Raphael Bostic, Boston Fed President Eric Rosengren, Kansas City President Ester George, Minneapolis Fed President Neel Kashkari, San Francisco Fed President Mary Daly

12:00 p.m. Philadelphia Fed President Patrick Harker 

 Wednesday 

Earnings: JPMorgan Chase, Goldman Sachs, Wells Fargo, Bed Bath and Beyond, Infosys, First Republic Bank 

8:30 a.m. Import prices

2:00 p.m. Beige book

2:30 p.m. New York Fed President John Williams

4:00 p.m. Atlanta Fed President Raphael Bostic

Thursday

Earnings: Bank of America, Citigroup, UnitedHealth, PepsiCo, BlackRock, Alcoa, PPG Industries, U.S. Bancorp, Charles Schwab, Delta Air Lines, Rite Aid, Wipro, Taiwan Semiconductor, Truist Financial, SunTrust

8:30 a.m. Initial claims

8:30 a.m. Retail sales

8:30 a.m. Philadelphia Fed survey

8:30 a.m. Empire State manufacturing

9:15 a.m. Industrial production

10:00 a.m. Business inventories

10:00 a.m. NAHB home builders sentiment

11:30 a.m. Atlanta Fed President Raphael Bostic

2:00 p.m. San Francisco President Mary Daly

4:00 p.m. TIC data

4:00 p.m. Cleveland Fed President Loretta Mester

 Friday

 Earnings: Morgan Stanley, PNC Financial, Kansas City Southern, Bank of NY Mellon, Citizens Financial, Ally Financial, State Street

8:30 a.m. Business leaders survey

8:30 a.m. Housing starts

10:00 a.m. Consumer sentiment

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