Deutsche Bank expects S&P 500 companies to deliver another strong earnings season, writing that a favorable macroeconomic backdrop and continued momentum in artificial intelligence-related sectors should help corporate profits exceed already elevated expectations.
The bank wrote that Wall Street currently expects S&P 500 earnings to grow 26.2% year over year in the second quarter, marking the highest consensus growth forecast heading into an earnings season outside of post-recession recoveries. Deutsche Bank forecasts earnings growth of 29.3%, implying companies could beat consensus estimates by roughly 3%.
According to the bank, upbeat corporate guidance has driven the sharp increase in earnings expectations. It wrote that 37% of companies have issued guidance above analyst estimates for the second quarter, compared with a historical average of 17%, while just 25% have guided below expectations, well under the long-term average of 40%.
Deutsche Bank wrote that semiconductor companies are expected to remain the largest driver of earnings growth, with profits in the sector projected to surge 148% year over year and account for roughly 11 percentage points of overall S&P 500 earnings growth.
The broader mega-cap growth and technology sector is expected to contribute another six percentage points, while the rest of the index is forecast to add about nine percentage points.
The bank also pointed to improving global manufacturing activity, higher oil prices and a weaker U.S. dollar as supportive factors for second-quarter earnings. It expects particularly strong earnings acceleration in the energy, materials and technology sectors.
While Deutsche Bank sees financial sector earnings growth slowing from the first quarter due to higher loan-loss provisions and weaker insurance results, it still expects the sector to outperform consensus forecasts. Consumer cyclicals are also expected to exceed current market estimates.
Looking beyond earnings, Deutsche Bank wrote that the historical backdrop remains favorable for equities. It noted that the S&P 500 has risen during earnings season roughly 75% of the time, with an average gain of about 2%.
“With equity performance strongly correlated with earnings growth historically, we see a positioning catch-up driving equities higher, if not in this earnings season, then over the medium term,” the analysts concluded.