Quarterlies in lights and shadows, how to navigate

The markets are now in the midst of the quarterly earnings season on both sides of the Atlantic, and a scenario has emerged that is made up of both lights and shadows. Indeed, the picture is one of a slight decline in year-over-year earnings, in light of the ongoing slowdown in a year marked by monetary tightening by the FED, but with sharp differences across sectors and geographies. A dispersion of results that creates both challenges and opportunities for savers and investors who want to bet on the stock market.

A weak corporate profit dynamic was not unexpected on Wall Street as the effects from the rate hike by the U.S. Central Bank continue to be felt in the balance sheets of U.S. companies. "More than a third of U.S. companies have already reported quarterly results for last year. Already the PMI indices, which have been declining throughout 2023, were hinting at a slowdown in earnings growth, which has in fact occurred, with an average year-on-year growth of -1 so far," explains Corrado Cominotto , Head of Active Asset Management at Banca Generali.

This -1 percent, however, is the product of a very different result of the different sectors that make up the S&P 500 index. Indeed, banks and other stocks in the U.S. financial sector, which, in keeping with tradition, are among the first to report results to the market, had disappointed in the first weeks of Wall Street's 'reporting season.' The decline in U.S. financial sector earnings, as of Jan. 19, had come in at -19.2 percent year-on-year, according to FactSet data. JP Morgan Chase reported declining profit mainly due to a $2.9 billion extraordinary item related to the bailout of some regional banks last year. Citigroup reported a quarterly loss of $1.8 billion, also announcing it will cut 10 percent of its workforce, while Bank of America net income fell more than 50 percent from a year ago.

They were not the only ones: "the sectors that have been weakest are pharmaceuticals, raw materials, and consumer durables," Cominotto points out.

Instead, the sector that had suffered most from the annus horribilis of 2022 and led the 2023 rally shone: Big Tech. Large U.S. tech companies reported significantly better-than-expected results, and among them was Meta, the 'parent company' of Facebook, Instagram, and WhatsApp, which was particularly surprising in this picture, whose stock last Friday gained more than 20 percent following the announcement of a $50 billion stock buyback and the introduction of a quarterly dividend, the first in its history, of 50 cents a share.

Meta, along with Tesla, Alphabet, Amazon, Apple, Microsoft, and Nvidia, is part of the group of the 'Magnificent 7,' technology companies that are among the world's most highly capitalized companies, but which by the nature of their business in the past have favored growth and investment over shareholder returns. With Meta, this brings the number of 'Magnificent Seven' companies paying dividends to three. In fact, Apple and Microsoft also distribute quarterly coupons to their shareholders, and Meta is the 'youngest' of the three, having turned 20 last month.

Meta's decision has started speculation about whether other tech companies may also take the same step. "It is difficult today to predict whether other tech companies will also decide to follow Meta's example and announce dividends in the future. According to some estimates for 2024, Alphabet and Amazon would be able to distribute dividends equal to 20-25% of their free cash flows, while typically this level for companies that are part of the S&P 500 is around 50-60%," Cominotto points out.

Instead, the sector that had suffered most from the annus horribilis of 2022 and led the 2023 rally shone: Big Tech. Large U.S. tech companies reported significantly better-than-expected results, and among them was Meta, the 'parent company' of Facebook, Instagram, and WhatsApp, which was particularly surprising in this picture, whose stock last Friday gained more than 20 percent following the announcement of a $50 billion stock buyback and the introduction of a quarterly dividend, the first in its history, of 50 cents a share.

Meta, along with Tesla, Alphabet, Amazon, Apple, Microsoft, and Nvidia, is part of the group of the 'Magnificent 7,' technology companies that are among the world's most highly capitalized companies, but which by the nature of their business in the past have favored growth and investment over shareholder returns. With Meta, this brings the number of 'Magnificent Seven' companies paying dividends to three. In fact, Apple and Microsoft also distribute quarterly coupons to their shareholders, and Meta is the 'youngest' of the three, having turned 20 last month.

Meta's decision has started speculation about whether other tech companies may also take the same step. "It is difficult today to predict whether other tech companies will also decide to follow Meta's example and announce dividends in the future. According to some estimates for 2024, Alphabet and Amazon would be able to distribute dividends equal to 20-25% of their free cash flows, while typically this level for companies that are part of the S&P 500 is around 50-60%," Cominotto points out.

Affecting the outlook for stock markets, however, are not only quarterly reports, but also expectations about monetary policy moves. "Regarding the attitude of central banks, it is worth noting that for the first time some analysts are speculating that the ECB may be quicker than the Fed in intervening by cutting interest rates. This is because employment data in the United States remain particularly strong. As an example, the unemployment rate for January was lower than expected," Cominotto warns.

How to seize the best opportunities in such a multifaceted environment? For Cominotto, "There is great volatility and the uncertain scenario on economic fundamentals make a do-it-yourself approach to selecting individual themes difficult. The advice is to be accompanied by professionals in investing, while continuing to look to the expertise of managers who can intervene in time when there are sudden market deviations. This is why it seems clear that active management, capable of efficiently seizing the various market opportunities that arise on various levels, both sectoral and geographic, is a valuable tool for making the most of portfolios. Indeed, there remain significant performance divergences within the same asset classes, such as in the United States, where the Nasdaq gains twice as much as the generalist S&P500 index over a one-year horizon, or in Europe. where Italian banks have outperformed European banks by more than 10 percentage points since the beginning of the year."