Investor Spotlight: US earnings - the final stretch

This issue of Investor Spotlight is brought to you by IG, with Kyle Rodda, Market Analyst and ausbiz presenter.

Stocks are moving higher. However, little of it is to do with earnings for the quarter. In this week’s Investor Spotlight, we dive into the final week of US earnings, look at how the market has performed so far, and review Walt Disney’s results from last week.

The story so far

The earnings story so far has been unequivocally underwhelming. According to data compiled by FactSet, as of the fourth of December, S&P 500’s tipped to deliver EPS growth of 2.2% for the quarter. That’s below the estimate of 2.7% going into the reporting period. Of greatest concern are the downgrades that have come from companies.

Profit growth is tipped to slow going forward as demand cools, with expectations now that EPS in Q4 will contract by one percent, and post a year-over-year decline.

Despite the soft earnings season, the S&P 500 has rallied in recent weeks, on hopes of a relatively less aggressive US Fed and a potential easing of Chinese COVID restrictions. The S&P 500 pushed through 3900 last week, and now eyes its 200-day MA and the downward-sloping trendline that’s capped recent bear market rallies.

S&P 500 weekly chart

Reviewing Disney’s results

In a week lacking heavy-hitting results, Walt Disney Co.’s quarterly report stood out as the most significant. The results were treated negatively by the market, with the company’s share price falling on the day they were released.

Data from Reuters suggests EPS for the quarter missed street expectations by 45%, to come in at $0.30 per share versus the $0.55 estimate. This came on revenues that were also below forecast, with sales for the period $20.15 billion, against expectations for $21.2 billion.

The miss was largely driven by underwhelming sales in the company's parks business, seemingly as demand for leisure and travel waned after a post-lockdown spike in previous quarters. Restrictions in China and the US hurricane season also impacted sales volumes and were a drag on profitability.

The focus for analysts was on Disney+ and its growth. Subscriber numbers continued to increase at an above-estimated clip. The streaming service added 12 million new subscribers, exceeding the consensus forecast of around 9.35 million. However, the push to expand the platform came at a higher-than-expected cost, with Walt Disney’s profits crimped by the significant investments the company is making to compete in the space.

Walt Disney’s results pushed its share price towards post-pandemic lows. Buyers once again emerged below $90 per share, with a rally faded above the stock's 20-week moving average.

Disney weekly chart

A look to the week ahead

The week ahead in US earnings will be highlighted by a handful of consumer giants.

Here are three companies to watch this week.

• Walmart

Walmart is often treated as the canary in the coal mine when it comes to US consumers. The company’s results will be closely followed for signs of softer demand, along with the effect higher costs are having on consumer company margins, and broader retail sales.

Analysts are expecting Walmart to post a nearly nine percent decline in profits on an annualised basis, with EPS tipped to be $1.32 for the quarter. This will be down from the $1.77 for the quarter. Revenues are expected to increase by nearly 20%. But it is believed that this won’t be enough to offset higher costs and subsequent margin compression.

Walmart’s shares trading within a short-term trend channel. However, the stock remains in the middle of its longer-term range. $150 per share could be one area of future resistance, with the price currently hovering around support at $140.

Walmart weekly chart

• Home Depot

Home Depot is another company treated as a bellwether for the US consumer. It is tipped to perform stronger than many of its consumer counterparts for the quarter, however, with analysts tipping EPS will rise five percent to $4.12 per share. This will come in revenue growth of three percent, with profits supported by more secure margins and successful cost management.

Home Depot’s technicals are looking positive, with momentum reversing in recent weeks. Price is seeing resistance at the 100 and 200-week moving averages, with key resistance around $320 per share. Support appears to be around $300 and $265 per share, with the 200-week MA proving to be a level targeted by buyers.

Home Depot weekly chart

• Target

Target’s stock is often used as a proxy for spending amongst lower and middle-income groups. Weaker consumer sentiment, diminishing household savings, and higher prices are expected to hit targets profits, with analysts forecasting Target's earnings to fall almost 30 percent for the quarter at $2.13 per share. A similar drop in revenues is being forecast.

Target shares are showing signs of bottoming, with prices carving out a series of higher lows. Traders will eye whether the stock can break key resistance at $172.

Target weekly chart