Investor Spotlight: US earnings week two preview

The US earnings season got off to a sluggish start. In this week’s Investor Spotlight, we look back at the first week of the US reporting period and preview what’s coming up in the week ahead.

Earnings season is off to a soggy start

While only a small number of S&P 500 companies have reported so far, the results on aggregate have been disappointing. Earnings growth for the quarter is expected to decline by 3.9%, which is down from the -3.2% forecast before the beginning of the reporting period.

As we touched on last week, the market’s earnings growth is forecast to be bookended by cyclical sectors. Analysts are expecting the strongest earnings growth to come from the energy and industrial sectors - the former helped by elevated energy prices in 2022.

By contrast, materials and consumer discretionaries are expected to deliver the biggest earnings decline.

Last week, the financial sector dominated the earnings newsflow.

JP Morgan, Bank of America, Wells Fargo, and Citigroup were just a handful of companies to report on Friday, with the results contributing to what is a forecast 10% decline in profits in Q4. This is down from a seven percent forecast drop two weeks ago.

The commentary from the banks cast a shadow over the markets. Wells Fargo management said it's preparing for the economy to become “worse”, while both JP Morgan and Citigroup said they anticipate a “mild recession” in the US this year. The major banks also increased their provisions for bad debts.

S&P 500 continues to climb

Despite the negative start to the earnings season, price action remains relatively bullish for the S&P 500. The index is approaching key trendline resistance around 4000, which if broken, opens up a resistance zone between 4100 and 4200. Meanwhile, technical support might be found at the market's recent higher low around 3760.

US 500 weekly chart

Three stocks to watch

• Goldman Sachs

Goldman Sachs will report with the second batch of major financial companies delivering quarterly results this week. Much like its counterparts that reported last week, Goldman’s results will be driven by a combination of higher interest rates and wider margins, the prospect of a slowing economy, and weakness in asset prices.

Because of its dependence on investment banking activity, Goldman Sachs is expected to post significant quarterly revenues and earnings declines. EPS is tipped to plunge nearly 50% to $5.48 per share, while revenues are forecast to contract by over 14%. Given the steep decline expected, much of the focus will be on what message the bank delivers about its outlook. EPS is forecast to decline by more than 12% next quarter; investors will be looking for any mention of a potential recession in the United States.

Brokers are divided as to the investment outlook for Goldman Sachs. Out of 26 surveyed analysts, 15 suggest buying its stock, but nine recommend a hold and two a sell. The consensus price target is trading at a discount right now at $397.35 per share.

The technicals look constructive for Goldman Sachs stock, as price action signals upside momentum. Resistance broke through $360 resistance last week, with the next key level to watch $390 per share.

Goldman Sachs weekly chart

• Netflix

Netflix is expected to report slowing revenue and earnings growth when it reports this week. The company’s sales growth is tipped to expand by a modest 1.76% for the fourth quarter, while EPS is forecast to decline by a significant 66%.

Netflix has been facing growing challenges in growing its business, as Disney Plus and Amazon Prime steal market share. A slowing economic environment and a shift in consumption patterns amongst households are also constraining subscriber growth, with analysts estimating the company added a relatively modest 4.5 million net paid subscribers last quarter.

A key detail for investors will be the impact of a changing revenue model will be on Netflix’s profits. The business rolled out paid advertising across its platform to provide a lower-priced alternative to customers last quarter.

The analyst community is mixed on the investment case for Netflix shares. Of 43 analysts, 21 have a buy, 19 have a hold, and three recommend a sell. The consensus price target is a fraction below the current price, at $306.56.

The short-term trend for Netflix shares is bullish, as the stock gradually reclaims the losses sustained through the first half of 2022. Price is trading within an upward trend channel, with key support around $320. A break of that level could see the stock push to the top of its trend channel. A confluence of support levels sit around $270 to $280.

Netflix weekly chart

• Procter & Gamble

Procter and Gamble (PG) is tipped to post a modest quarterly decline in earnings, driven by a 1.25% dip in revenues. Analysts expect the business to post EPS of $1.59 per share, which would be a 4.48% drop from a year earlier. The decline in profitability marries with a broader drop in earnings expected for consumer staples stocks this quarter. FactSet data suggest the sector will deliver a 3.4% contraction in EPS.

Investors will be on the lookout for commentary from Procter and Gamble’s management team about the US growth outlook, along with the headwinds that the company has highlighted as a risk to margins in previous quarters. Cost pressures have eased over the quarter, as has the impact of a stronger US dollar. Despite this, analysts are forecasting margin erosion during the quarter.

Brokers remain broadly positive on Procter and Gamble stock. 15 analysts out of 26 have a buy rating, while the remaining suggest a hold. The price target is $153.15 per share.

The technicals of Procter and Gamble shares show a range-bound stock, with the price currently around the middle of its long-term range. In the short-term, momentum looks to be moving to the downside, as the stock finds support around $150 per share. A breakthrough at that level could open a pullback into the 140s.

Procter and Gamble weekly chart