This week marks the kickoff of the corporate earnings season. As per tradition, the major US banks will lead the way. Other heavyweights set to report include J&J, Netflix, and PepsiCo. In Europe, LVMH and ASML will be particularly closely watched.
What makes this quarter somewhat unique is that expectations appear quite elevated. Indeed, the war in Iran has darkened the macro outlook (higher inflation, lower growth). However, at the same time, overall analysts have raised their earnings estimates.
For S&P 500 companies, analysts forecast 17.6% growth in 2026, according to the FactSet consensus. Specifically, it is the energy sector where profit estimates have been revised higher, while the consensus for other sectors has remained relatively stable.
Earnings growth estimates for the energy sector. Source: FactSet
Mechanically, high expectations leave less room for positive surprises. Typically, companies strive to create the opposite scenario: they encourage analysts to lower their earnings estimates to better beat the consensus on the day of the announcement. This is why earnings seasons have often served as positive catalysts for equity indices.
While expectations seem high this quarter, the silver lining is that valuations have significantly eased. This is the result of the market correction combined with, as previously mentioned, earnings estimates that have remained unchanged or been revised upward. Consequently, the S&P 500 forward P/E stands at 20.4x, compared to 22x at the end of last year.
And while tech long drove US market valuations higher, the reverse is now occurring. Fears of AI-driven disruption have led to a massive de-rating across the sector. To such an extent, in fact, that tech valuations have returned to levels seen prior to the AI boom.
Source: Apollo Global Management
