The financial reporting season begins, "Mag 7" returns

The U.S. earnings season will kick off on Friday, with a stable economy expected to drive profit growth for S&P 500 index component companies, while strong profits from large tech companies will be a key driver.

According to data compiled by Bloomberg, the "Mag 7" in the U.S. stock market (including Apple, Microsoft, Google, Amazon, Nvidia, Meta, and Tesla) are expected to see a 38% increase in profits in the first quarter of 2024.

Meanwhile, as of Thursday's U.S. market close, Google is approaching a market value of $2 trillion, Amazon's stock price hit a record high, and Apple's stock price rose due to plans to overhaul its Mac product line.

Media quoted George Ball, chairman of Sanders Morris, as saying, "What will drive the market in the future is no longer the Fed's interest rate cuts, but corporate profits. Even in the current high interest rate environment, actual corporate profits are much stronger than expected."

Market closely watching U.S. earnings season

In fact, investors will closely monitor the earnings of these companies to validate whether the S&P 500's price-to-earnings ratio is reasonable, which is about 20% higher than the average level of the past 10 years.

Currently, the price-to-earnings ratio of the S&P 500 index is 21 times, equivalent to a 4.8% yield. Considering that the 10-year U.S. Treasury yield has risen to 4.5%, this multiple is starting to look less favorable. In fact, the valuation advantage of stocks over bonds is approaching its lowest level in nearly 20 years.

"We are currently in an environment where stocks appear to be fully valued, market rates are rising, and consensus expectations for Fed rate cuts are weakening," said John Lynch of Comerica Wealth Management. "Therefore, we believe that the continued growth of corporate profits is crucial to proving the current stock valuations and investor sentiment."

Mike Dickson of Horizon Investments also stated that investors' expectations for U.S. companies have risen significantly, which could be a double-edged sword. He said that higher expectations are a sign of bullish market sentiment, but the more profit expectations are raised, the harder it is for companies to exceed those expectations.

Dickson added, "As Wall Street typically rewards companies that outperform expectations and punishes those that meet or fall below expectations, we will closely monitor how investors reassess the prices of various stocks after earnings reports are released. At present, investors still seem optimistic about the prospects of the "Mag 7."

Apple and Amazon catching up

On Thursday, Apple's stock price saw a rare surge, closing up 4.3%, adding $112 billion to its market value in a single day.

Amid a series of setbacks and a stock price slump since the beginning of the year, some Wall Street analysts, including those from Bank of America and JP Morgan, have expressed optimism about Apple. On the same day, reports indicated that Apple is planning a major upgrade, with the Mac computers set to be equipped with the new generation chip M4, with artificial intelligence (AI) capabilities being a highlight of the M4. These related news significantly boosted Apple's stock price on that day.

Meanwhile, Amazon's stock price closed at $189.05 on Thursday, rising by 1.7% to reach a historic high. So far this year, its stock price has risen by 24%.

Previously, due to a cooling demand for online shopping, rising costs, and a slowdown in the growth of its profitable Amazon Web Services (AWS) division, Amazon's stock price had plummeted by more than half.

In order to regain investor confidence, Amazon has pledged to cut costs and restructure its business. Its streamlined operational measures have helped improve profits and regain shareholders' confidence.

Analysts are increasingly optimistic about Amazon's retail business as well. Morgan Stanley analyst Brian Nowak stated that the growth in retail business profits has boosted investors' confidence in Amazon's ability to achieve stronger profitability and free cash flow in the coming years