Major U.S. companies are announcing their Q2 and Q4 results starting this week. Predictions suggest that net corporate profits will increase by about 8.8% compared to the same period last year, marking the highest level since the ultra-low interest rate period in 2022. Investment banks that underwrite bond issues and Initial Public Offerings (IPOs) are also expected to record significant revenues thanks to improved corporate performance.
Citing U.S. market research firm FactSet on the 7th (local time), the Wall Street Journal (WSJ), estimated that the net profit of companies listed on the Standard & Poor’s (S&P) 500 index will increase by 8.8% in Q2 and Q4 this year compared to the same period last year. If this estimate proves accurate, it will mark the fourth consecutive quarterly increase and the largest increase since the first and fourth quarters of 2022 when the Federal Reserve maintained a zero-level (0-0.25%) interest rate.
After aggregating predictions by market analysts, FactSet reported that the net profit of S&P 500 companies would improve by 11% overall this year. By industry, the net profit of the telecommunications services sector, which includes Alphabet and Meta, is predicted to increase the largest by 18%. The healthcare sector’s net profit is estimated to increase by 17%. The net profit in the materials sector, however, is expected to decrease by 10% compared to the previous year.
The WSJ pointed out that investor confidence in large tech stocks could be confirmed during the earnings announcement period in July and August. The S&P 500 index rose 17% this year, followed by the ongoing artificial intelligence (AI) boom since last year. The stock price for NVIDIA has more than doubled this year, while Meta (53%), Amazon (32%), Microsoft Corporation (24%), Apple (13%) and other large-cap stocks also recorded double-digit growth rates. The WSJ assessed that for the stock prices of these large tech companies to continue rising, they should deliver performance in line with each company’s valuation and earnings forecasts.
Currently, the U.S. stock market is experiencing a downturn in investor sentiment as the Federal Reserve, maintaining the highest interest rate in 23 years, recently lowered the possibility of an interest rate cut. The WSJ explained that if corporate performance also weakens amid adverse conditions, the stock market’s upward momentum could worsen.
Looking at the performance of the financial sector alone, the business outlooks of the companies are not bad. Citing market insiders on the 7th, the Financial Times (FT) predicted that the average Q2 and Q4 revenues of JP Morgan Chase, Goldman Sachs Group, Inc., Morgan Stanley, Bank of America (BofA), and Citigroup would increase by 30% compared to the same period last year.
These investment banks saw a significant increase in fee revenues from M&A, IPOs, and corporate bond issuance during the ultra-low interest rate period of 2021 to 2022. However, their performance has not been favorable for nearly two years since the Federal Reserve’s interest rate hike. The FT explained that Citigroup also benefited from brokering the historic energy sector merger last October between ExxonMobil and Pioneer Natural Resources that was finalized in May. JP Morgan and Goldman Sachs also increased fee revenue by brokering the $1.35 billion in corporate debt refinancing of U.S. healthcare company Peloton last May. JP Morgan announced to investors last month that it would revise its Q2 and Q4 revenue growth forecast for this year to 30%, about twice the previous figure. Jefferies, another U.S. investment bank, announced earlier this month that its revenue for the three months from March to May increased by 60% compared to the same period last year, noting a bright outlook for the second half of this year and next year.
U.S. investment banks, which saw a hit to their revenues as mergers, listings, and corporate bond issuance temporarily stalled due to high interest rate shocks, are hopeful as the U.S. stock market performs well despite high interest rates and the recession risk lifting. However, market insiders warn that risks remain as the Federal Reserve maintains high interest rates, making it difficult for investment banks to recover debts. The amount of debt written off as uncollectible by the four major U.S. banks, including JP Morgan, BofA, Citigroup, and Wells Fargo, in Q2 and Q4 was at least $7 billion, an increase of more than 50% compared to the same period last year.
