American firms are currently experiencing one of their strongest earnings seasons in years, yet analysts caution that rising energy costs and weakened consumer sentiment due to the conflict in Iran might complicate matters going forward.
As the first-quarter earnings reports roll in, around 84% of S&P 500 companies have exceeded profit expectations, as per FactSet. This figure is noticeably above the average of 78% across the last five years.
Researchers at Deutsche Bank have termed this earnings season “one of the best in the previous two decades.” They noted that every one of the S&P 500’s leading sectors, including tech and healthcare, is projected to report annual profit growth for the first time in four years.
However, most of the gains seem to originate from AI-related demand within the tech industry. According to Parag Zatte, a Deutsche Bank strategist involved in the report, while consumer-focused companies have seen some growth, it’s been relatively mild.
“At first glance, things appear promising, but you really need to dig deeper to see where the potential issues lie,” shared Tracy Schuchart, a senior economist at NinjaTrader.
Companies catering to low- and moderate-income consumers, such as McDonald’s and Domino’s Pizza, have already adjusted their second-quarter forecasts downward. Schuchart indicated that the most significant repercussions will occur when retailers selling high-ticket items, like Home Depot and Lowe’s, begin to revise their earnings expectations.
Whirlpool, a consumer electronics manufacturer, issued a warning on Wednesday regarding “recession-level industry decline,” altered its full-year outlook, and hinted at impending price hikes.
On the other hand, McDonald’s reported another solid quarter, beating estimates for both profit and sales. This was in line with positive results from other chains like Burger King and Taco Bell, which took analysts by surprise given concerns that increasing fuel prices would negatively impact consumer spending in the fast-food sector.
CEO Chris Kempczinski acknowledged that surging gas prices—now about 50% higher than pre-war levels—were starting to take a toll on spending habits.
“I think it’s fair to say it’s not really improving. It might actually be getting slightly worse,” Kempczinski remarked during the earnings call.
Meanwhile, companies like Uber, Disney, CVS Health, and Novo Nordisk all announced strong first-quarter profits, with executives emphasizing ongoing consumer spending despite the surrounding uncertainties. Uber’s CEO reported that people are still spending on rides, noting that “there are no signs of slowing down right now,” while Disney stated its theme parks are seeing robust attendance.
The tech sector also contributed to this positive earnings season, with Amazon, Meta, Microsoft, and Alphabet all reporting strong financial outcomes. Amazon pointed out substantial growth in its AI business, suggesting that its investments in expansive data centers are starting to bear fruit.
Despite this, investors are worried about tech companies potentially overspending on AI, resulting in drops in stock prices for Meta and Microsoft, even though they reported good earnings.
Major U.S. banks like JPMorgan Chase, Citigroup, Wells Fargo, and Bank of America recorded their best first-quarter profits in years last month. Bank executives noted a surge in trading activity, although JPMorgan CEO Jamie Dimon warned about numerous economic risks facing the U.S. economy.
JPMorgan’s trading division generated a record $11.6 billion this quarter, while Citigroup marked a ten-year high in quarterly revenue, reporting $24.6 billion, with profits rising by 42%.
