Investor Spotlight: US earnings season preview

Analysts are forecasting the first contraction in S&P 500 earnings since Q3 2020. In this week’s Investor Spotlight, we will preview the Q4 reporting period and delve into three companies reporting in the week ahead.

Earnings set to fall

According to data compiled by FactSet, the S&P 500 companies are poised to post earnings growth of -4.1% for the quarter. If this materializes, it will be the first negative quarter of earnings growth since the third quarter of 2020 - the depths of the COVID-19 recession.

Revenue growth is also expected to slow to 3.8%.

It’s shaping up as a mixed reporting period when breaking the market down the performance by sector. The S&P 500 will be bookended by cyclical areas of the market, with materials and industrials the biggest underperformers, but energy and industrials tip to perform the strongest.

Meanwhile, the heavily weighted tech sector is expected to deliver a second consecutive quarter of negative earnings growth, with a 9.5% contraction.

Recession risk and earnings downgrades

From a thematic standpoint, investors will be on the lookout for talk of weakening growth, earnings downgrades, and possibly forecasts of a US recession. In recent weeks, several major tech companies, including Amazon and Salesforce, have announced major layoffs.

The word “recession” also featured prominently in management commentary during the Q2 and Q3 earnings periods, with investors wary of continued warnings of negative US growth this year. The general negative has manifested as increasing negative guidance from companies, along with a downgrade in earnings expectations for the quarter.

Analysts had been forecasting a 3.5% increase in profits across the market prior to the last earring season.

S&P 500 remains in a downtrend

Price action for the S&P 500 clearly shows the index in a downtrend, with a long-term pattern of lower-highs and higher-lows observable.

The weekly charts convey a slowing of downside momentum, however, with the RSI around 50 and moving sideways. There are also tentative signs of price carving out a higher-low, which has yet to be confirmed. Major support is around 3600 with dips below the 200-week moving average treated as a buying opportunity in the past.

A break above trendline resistance and the 50-week moving average would need to be seen before greater hopes of a trend reversal emerge.

US 500 Cash weekly chart

The stocks reporting in the week ahead

When it comes to companies reporting in the week ahead, the week begins slowly before Friday welcomes the first batch of results from several major US banks.

Here are the companies reporting this week.

Three stocks to watch

• JP Morgan Chase

The financial sector is expected to deliver negative earnings growth this quarter. JP Morgan Chase reports on Friday the 13th before the bell and is tipped to report a 6.99% contraction in EPS.

America’s biggest bank is confronting all the headwinds pushing against the broader financial sector. While interest rates are rising, a slowing economy and a weaker housing market are restricting loan growth. A weaker stock market is also likely to drag on the investment banking business.

Analysts expect that EPS for the quarter will drop to $3.10, which will take earnings growth for the full year to $11.65. That will be a decline of 24.18% versus the previous financial year.

Currently, the analyst community remains positive on JP Morgan stock. 16 analysts recommend a buy or a strong buy. 11 recommend a hold. The consensus price target is $1.44 per share.

The technicals look constructive for JP Morgan shares currently. Momentum is pointed to the upside as the stock tests resistance around $145 per share. A confluence of support appears at around $125 per share.

JP Morgan Chase weekly chart

• Taiwan Semiconductor Manufacturing Company (TSM)

Taiwan Semiconductor Manufacturing Company reports before the bell on Thursday and is expected to post strong earnings growth. Analysts are forecasting EPS of $1.77 for Q4, with earnings growth rising 53.9% on revenue growth of more than 30%. For the full year, EPS is tipped to rise 56% to $6.45 per share.

Several thematics are likely to be in play when TSM delivers its results. First, the macro concerns of slowing demand for chips amid broadening weakness in global economic conditions will inform views on topline performance this year. Secondly, investors will be looking for greater guidance on supply disruptions and potential cost pressures going forward.

Another major theme will be the structural risks posed by geopolitical tensions between the US and China, especially as it related to Taiwanese territorial sovereignty. The US has made moves to begin the reshoring of chip manufacturing, which may affect TSM’s long-term growth prospects.

Overall, analysts remain bullish on Taiwan Semiconductor shares, with 9 recommending a buy and three a hold. The consensus price target is a hefty premium above the current market price and at $97.46 per share.

From a technical perspective, TSM remains in a downtrend. However, there are signs of a potential reversal emerging. Short-term support is around $73.50, while the first major level of resistance is around $83-84 per share.

Taiwan Semiconductor Manufacturing weekly chart

• UnitedHealth Group (UHG)

UnitedHealth Group is forecast to post another solid quarter of earnings. EPS is tipped to rise 15.4% to $5.17 for the quarter and nearly 16% for the full year.

The strength in profits defies the malaise of the broader healthcare sector, which is tipped to post negative earnings growth for the quarter. UnitedHealth Group is proving the beneficiary of several major tailwinds, including an increase in demand for healthcare services, along with the continued expansion of health insurance across the United States.

Analysts remain broadly constructive on UnitedHealth Group. Of 25 analysts, 22 recommend a buy rating. The remaining three suggest a hold, with the consensus price target a significant premium at $597 per share.

The technicals of UHG are flashing bearish signals, however. Following updated guidance and some broker moves, the stock tumbled last week, with its long-term uptrend breaking down. The next level of major support appears to be around $450 per share. In the bigger picture, sellers have tended to emerge around $550.

UnitedHealth Group weekly chart