A few companies have already reported, but this Friday, earnings season will kick off in earnest as three major banks (JPMorgan, Citigroup and Wells Fargo) give their quarterly updates. The last earnings season (in October) was the first time in more than a year that major US companies, in aggregate, reported that their profits were growing compared to the previous year. Wall Street expects profits to have increased again this season – and to accelerate for the rest of the year (which is usually positive for stock prices).
Why should I care?
The bigger picture: The recent good economic news should feed through into companies’ profits. Virtually all recent data has suggested that the US economy picked up in the latter half of 2016. This means it’s more likely that companies’ total revenues will increase: in a growing economy, people typically spend more money on things, and companies buy more equipment and services to meet the growing demand from their customers. Some companies have already said they are seeing this feed through into sales (e.g. Delta Airlines).
For markets: Stock prices are already reflecting at least some of the (expected) good news. Investors don’t just wait to buy and sell stocks until companies report their earnings. Instead, they try to predict what will happen. Stock prices have already been driven up to record levels (partly because the economy has picked up – see above); so in effect, much of the good news may already be “priced in.” Optimistic investors will be hoping for better-than-expected results and, perhaps more importantly, signs that the positive momentum will accelerate in the coming months.
Originally posted as part of the Finimize daily email.
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