The market’s strong reactions to the latest quarterly results from Netflix, Citigroup, and Goldman Sachs are fueling expectations that this US earnings season could be a stock picker’s moment.
It’s easy to see why: companies that delivered reports in the first week saw their shares move by 6.1% on average. That’s even more than the 5.3% average move seen in the quarter before – which itself was the biggest since at least 2014. And, as Morgan Stanley rightly points out, there could be some investing opportunities in that.
What’s going on here?
Companies that beat expectations for both sales and earnings in the early part of this results season did more than 3 percentage points better than the overall S&P 500 the next day. Historically, those companies would have outpaced the index by an average of just 1.5 percentage points on those days.
In the first week of this earnings season, Citigroup and Goldman Sachs were among the strong performers: their shares rose 6%. Netflix, meanwhile, closed 10% higher after reporting its biggest-ever quarterly jump in subscriber numbers.
This week, five of the Magnificent Seven tech firms are scheduled to deliver earnings, with Apple, Microsoft, Meta, and Tesla opening their books.
Swiss bank UBS said it expects a narrowing gap between AI revenues and capital spending to drive Big Tech’s 25% earnings growth for the December quarter. And the Wall Street consensus shows earnings expected to rise an average of 11% year-on-year, based on sales growth of 3%.
What’s the opportunity then?
Morgan Stanley said it foresees a relatively wide dispersion of earnings-per-share revisions to create a good scene for stock picking.
Not least of the things affecting performance is the fact that the US dollar gained 9% against its major rivals in the final quarter of 2024, according to the closely watched dollar index. And the experts at Morgan Stanley wager that factor alone could lead to higher performance dispersion across the market this earnings season. And, it notes that higher dispersion tends to foster a better stock-picking backdrop.
The investment bank said company execs will likely face questions about their expectations for further margin expansion, considering the bar was already set high for firms heading into 2025. And it said it will be checking out how rate-sensitive industries are faring given the slow pace of US interest rate cuts. And consumer spending patterns and the potential for supply chain changes aimed at avoiding tariff impacts will also likely be a key focus.
With all that going on, the bank has highlighted 14 companies that could expect a near-term stock-moving catalyst.
It sees potential downside risk when four companies report their latest earnings: Caterpillar, Fortinet, Paramount, and Teradyne.
And it sees the potential for an upward move for ten firms: Axon, Cloudflare, Moelis, Prosperity Bancshares, Synchrony Financial, Vertex, W.W. Grainger, Disney, Western Digital, and Zebra Technologies.
To explore just two: Disney has seen its shares weaken since November, but Morgan Stanley says they could jump higher if the company reports income growth in its “experiences” segment. Cloudflare, meanwhile, could be in for a breakout year in 2025. Morgan Stanley sees the cloud solutions business shining as sales productivity and emerging AI trends drive more meaningful upward estimates.
---
Capital at risk. Our analyst insights are for educational and entertainment purposes only. They’re produced by Finimize and represent their own opinions and views only. Wealthyhood does not render investment, financial, legal, tax, or accounting advice and has no control over the analyst insights content.
Join the Investors' Club
Get access to professional investing tools for free and start building your wealth today!
Capital at risk
