Dow Jones, Nasdaq, S&P 500 weekly preview: Here comes Q1 earnings season

By Senad Karaahmetovic

S&P 500 Futures are trading lower on Monday after a largely uneventful, holiday-abridged trading week, which saw the benchmark U.S. stock market index close 0.1% higher. The last week also saw the thinnest volume recorded in the S&P 500 since December.

The Dow Jones Industrial Average (DJI) ended the week 0.6% higher, recording its fourth consecutive positive weekly close. On the other hand, the Nasdaq Composite Index (IXIC) fell 1.1% after rising 11.5% over the last 3 preview weeks.

Looking forward to this week, investors continue to digest Friday's jobs report, which was mostly in line with the Street's expectations.

The latest inflation data will be released on Wednesday. The consensus sits at +0.4% month-over-month and +5.6% year-over-year for core inflation. The headline inflation is seen rising 0.3% and 5.2% MoM and YoY, respectively.

The FOMC meeting minutes will also be out on Wednesday with investors likely to look for more clues about credit tightening expectations following the banking crisis. As of Friday, the market is currently assigning a ~60% chance the Fed will hike by 25 basis points in May.

Finally, the latest retail sales data is expected on Friday.

Q1 earnings season starts

The S&P 500 first quarter earnings season is set to start later this week. The Street expects earnings to fall 7% YoY, which would mark the largest quarterly decline since Q3 2020. For the last quarter, the S&P 500 earnings fell 1% YoY.

Materials and Health Care are expected to post the biggest earnings decline, followed by Communication Services and Tech. Conversely, Energy and Industrials are seen earnings more than year-ago.

Goldman Sachs analysts expect that deep margin contraction will more than offset modest sales growth, the trend which started in Q3 2022.

"Margins for the aggregate S&P 500 will contract by 146 bp relative to the comparable year-ago quarter, representing the worst quarter of margin contraction since the pandemic. This will more than counteract slight nominal sales growth of 2% in part due to high inflation," the analysts explained.

Goldman expects the S&P 500 will earn $224 in 2023, higher than the bottom-up consensus of $220.

"We expect slightly stronger sales growth and shallower margin contraction. Our forecasts imply that margins will shrink by 50 bp in 2023, while consensus expects more dramatic margin contraction of 90 bp. However, our 2024 EPS estimate of $237 remains below consensus of $247, representing 5% growth yr/yr (vs. 12%)," the analysts added.

JPMorgan and Citigroup are due to report tomorrow with ~87% of the index expected to report by the first week of May.

"In the weeks ahead Q1 earnings season should offer plenty of clues as to the market's direction in this second quarter," said Oppenheimer's strategists on Monday.

What analysts are saying about stocks

Edward Jones analysts: "For long-term investors, there may be opportunities forming in the months ahead, particularly as markets start to look past the economic slowdown toward a recovery period."

Sevens Report analysts: "We think the near-term risk/reward at these levels remains unattractive, and we are maintaining our defensive tactical stance. Moreover, we think slowing growth remains the biggest and clearest trend in markets right now, and we want to insulate portfolios from that impact."

Barclays analysts: "Valuations are too optimistic relative to our base case for a shallow recession and $200 SPX EPS in 2023. However, what if markets stay willing to look through an earnings contraction of this magnitude? Do we ever revisit the lows? Ultimately, we think the bull case for equities, like valuations, is still a stretch."

Oppenheimer analysts: "We remain of the view that we're not "out of the woods" yet but that the "light at the end of the tunnel" appears to be sunlight rather than the head lamp of a locomotive bearing down upon us."

Citi analysts: "We see a disconnect between markets presuming much easier Fed policy on "softer" data and how the Fed will actually see the data. Not only should high inflation and a still-strong labor market keep cuts unlikely, but we see persistently too-strong inflation, including a 0.5% MoM increase in core CPI next week, as leading to further hikes. We maintain our expectation for three 25bp rate hikes at the coming meetings with a policy rate reaching 5.50- 5.75%."

Vital Knowledge analysts: "There are clearly growth headwinds in the US (although perhaps not as strong as some fear, as evidenced by the Fri BLS jobs report) and equity valuations are far from cheap, but we continue to disagree with the prevailing consensus on earnings (companies, especially the big ones in the S&P 500, have tailwinds unique to this period that will help preserve EPS even if/as aggregate demand softens)... We stay more bullish than most."