First-quarter earnings are here. So is the 'hard part' in the fight against higher prices.

By Bill Peters

Earnings Watch: Delta, JPMorgan lead off first-quarter earnings season, amid anxieties over office-space market, higher bar for air travel

With first-quarter earnings reports just around the corner, the biggest battles with inflation might be out of the way for businesses and their customers. The impact of the smaller ones could just be starting.

The results will provide a fuller look at what kind of year 2024 will be, after the previous three years all had at least something that drove up prices or kept them higher.

In 2021, it was the economy's reopening after the pandemic and the supply-chain crunch. In 2022, it was the war in Ukraine. By 2023, as the Federal Reserve raised interest rates to keep a lid on it all, shoppers were struggling to stay on top of higher prices for basics and the suspicion had grown that companies had taken advantage of three years of upheaval to charge more.

Those historic disruptions may have actually been the easy part of the Fed's fight against higher prices, said Matt Stucky, chief portfolio manager of equities at Northwestern Mutual Wealth Management.

"Now, we're in the hard part," he said.

Strong employment trends and wage gains have kept higher prices and interest rates in place, he said, but as that trend holds steady, so has consumer caution and expectations for an eventual slowdown. March's scorching jobs figures continued to defy skeptics, and others suggest the U.S. is starting to accept the current landscape as the new normal.

"The fact that the labor market is so strong shows that companies and the economy are adapting to high interest rates," Glen Smith, chief investment officer at GDS Wealth Management, said in emailed commentary on Friday.

Delta Air Lines Inc., and JPMorgan Chase & Co. lead off the quarterly results this week. Wall Street expects modest profit growth for corporate America overall, as consumer demand hangs on, even as companies keep prices elevated and cut costs to nurture the bottom line.

But the first-quarter results could be a lot like those in the fourth-quarter. And even as the market rallies, deeper signs of pessimism remain among executives. Struggles among lower-income consumers, an uptick in late bill payments, and deeper fissures in commercial real estate remain areas of concern.

Growth in the big technology sector will likely continue bail out the rest of the market, but investments in artificial intelligence, along with antitrust actions, could take years to play out, testing investor patience amid the ongoing debate about whether the AI boom is actually another tech bubble.

"As was the case in the preceding two quarters, the tech sector remains a key growth driver in 2024 Q1," Sheraz Mian, research director at Zacks, wrote last month. "Had it not been for the robust tech sector earnings growth, total earnings for the rest of the index would be modestly in negative territory."

Wall Street analysts, collectively, expect S&P 500 companies to put up earnings-per-share growth of 3.2% for the first quarter, according to FactSet. That's lower than calls for 5.7% growth at the end of December.

They also expect profit margins of 11.5% during the first quarter, according to FactSet. That would be above the 11.2% in the previous quarter, as parts of corporate America cut costs and lay off staff to shield the bottom line.

Analysts generally temper their expectations as they get closer to the date when a company reports results, but John Butters, senior earnings analyst for FactSet, has noted that analysts were revising their forecasts at a degree that was smaller than average - in contrast with the outlook from the companies themselves.

"While analysts have been less pessimistic in their estimate revisions for S&P 500 companies for the first quarter compared to recent averages, companies have been more pessimistic in their earnings outlooks for the first quarter compared to recent averages," he said in a report late last month.

"As a result, estimated earnings for the S&P 500 for the first quarter are lower today compared to expectations at the start of the quarter," he added.

For the first quarter, 79 companies in the S&P 500 have put out downbeat profit forecasts. That's the second highest since the second quarter of 2019, according to FactSet. Thirty-three forecasts have been positive.

This week in earnings

Nine S&P 500 index companies, including one from the Dow, report results in the week ahead.

Outside of the banks, Wall Street will be zeroed in on results from Delta (DAL), which reports on Wednesday. BofA analyst Andrew Didora, in a research note on Thursday, said he would be focused on summer-season demand, corporate travel trends and fuel prices.

Delta has driven profits through its premium seating classes and American Express (AXP) card partnership, but Morgan Stanley analysts said that the airline industry was entering first-quarter earnings season with unusually high expectations, after a multi-year rebound from the pandemic.

"All eyes will be on the resilience of the forward booking curve into the summer despite very tough comps, especially in domestic and trans-Atlantic," they said. "Corporate progress needs to be evident as well."

The call to put on your calendar

JPMorgan, Jamie Dimon: When JPMorgan (JPM) reports first-quarter results on Friday, Wall Street will be dialed in to Chief Executive Jamie Dimon's take on the broader economy. As a MarketWatch bank earnings preview story noted, the first quarter saw an uptick in deal-making, but expectations for interest-rate cuts - which might jolt the economy by making it easier to borrow money but eat into banks' profits - have dimmed.

But while JPMorgan is seen as a bellwether for the economy, it's also far bigger and diversified than its regional rivals. Which means it's far more insulated from other tremors in the banking world.

The numbers to watch:

Reserves, delinquencies, commercial real estate: Citigroup Inc. and Wells Fargo & Co. (WFC) also report on Friday. Those results arrive as Citi (C) overhauls its corporate structure and exits some businesses abroad, and as both banks try to keep an eye on consumer credit and commercial real estate - an industry that has been upended as businesses reconsider their office spaces amid the rise of hybrid work.

Vulnerability to those changes has been bad news for banks like New York Community Bancorp Inc., which has scrambled to patch up its finances. Some of NYCB's (NYCB) depositors have looked to stash their money elsewhere.

Stucky said that any depositor exodus would likely benefit the bigger banks, whose bigger cash cushions might make them more attractive to jittery consumers, but he said any sign that NYCB's troubles had rippled through to its larger counterparts could trigger a rush to the exits for stock traders.

"If there's an unforeseen reserve that's taken up around commercial real estate, that'll get investors' attention pretty quickly," Stucky said.

-Bill Peters

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

04-07-24 1001ET

Copyright (c) 2024 Dow Jones & Company, Inc.