The market may be trading sideways at the moment as traders digest rising Treasury yields and banter around meme stocks and higher taxes, but it could come alive again soon amid looming first quarter earnings reports from corporate America.
Because all indications are that a profit explosion from corporate America is poised to be on full display as earnings reporting season kicks off in mid-April. Those hearty bottom line gains would reflect companies cycling comparisons to businesses being totally shut last year at the start of the pandemic, people returning to work and consumers spending their new stimulus checks.
First quarter earnings growth for the S&P 500 is expected to be 23.3%, according to data from FactSet. If hit, earnings growth for the first quarter would be the fastest since the third quarter of 2018.
Eight sectors out of 11 total are seen reporting year-over-year earnings growth. The consumer discretionary sector is expected to lead the way with a healthy 104% year-over-year earnings growth. Three sectors are projected to report an earnings drop, paced by a 15.6% decline for the industrials.
Naturally, the profit strength reflects an improved trajectory on the top line for businesses.
FactSet estimates year-over-year revenue growth for the S&P 500 of 6.3% for the first quarter, above the five year-average growth rate of 3.5%. If reached, first quarter sales growth would be the best dating back to the fourth quarter of 2018.
Some companies have done their best to signal to investors that a profit boom lurks, even if it has fallen on deaf ears with so much focus on the Street right now on inflation, taxes and yields.
FactSet says 94 S&P 500 companies have issued EPS guidance for the first quarter — 60 have offered positive EPS guidance and 34 negative.
The S&P 500 is relatively flat since March 11, shows Yahoo Finance Plus data.
While not S&P 500 components, retailers L Brands and At Home last week served up a taste of what could lay ahead for a good number of larger companies on their reporting days in coming weeks.
L Brands materially lifted its first quarter earnings guidance on Friday to $0.85 to $1.00 a share from $0.55 to $0.65 previously. The company cited "improved sales trends which the company believes are primarily driven by unusual shifts in consumer spending patterns, resulting from government stimulus payments, a relaxation of COVID-19 restrictions and other factors" as the cause of the guidance lift.
It represents the second time in the past five weeks L Brands has lifted its first quarter guidance.
Meanwhile, At Home CEO Lee Bird told Yahoo Finance Live on Friday sales are booming quarter-to-date.
"And the first quarter continues that momentum [from the fourth quarter]. We guided the Street for over 142% to 153% [same-store sales growth] for the quarter. All of our stores were closed for six weeks in March because of COVID last year. But we just see no change in our business," Bird said.
Profit momentum is likely to continue beyond the first quarter, thereby providing another potential catalyst to stocks.
Wall Street analysts expect double-digit earnings growth for the second, third and fourth quarters of the year. Earnings growth is seen peaking at a 51.9% clip in the second quarter, says FactSet.
RBC Capital Markets head of U.S. equity strategy Lori Calvasina recently lifted her S&P 500 target to 4,100 for 2021 (her bull case: 4,600) in large part because of an improving profit outlook by companies. Besides revenue growth coming back quickly for companies, Calvasina has been impressed by how companies have controlled expenses during the pandemic. That is likely to lead to profit margin upside for many companies this year.
"We are hearing though a lot about structural efficiencies that were gained during the pandemic. In other words, these management teams are super smart and they really figured out ways to cut costs. That is going to flow through to the margin line as we see revenues improve," Calvasina told Yahoo Finance Live.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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