Nasdaq 100 Forecast: Neutral

• The Nasdaq 100 index fell over 10% from December high as earnings season arrives.
• Investors worried that rising wage inflation and Fed rate hikes may dampen earnings prospects.
• Apple (AAPL), Tesla (TSLA), and Microsoft (MSFT) results are in focus this week, which will set the tone for Nasdaq 100.

The Dow Jones, S&P 500, and Nasdaq 100 indices consolidated at the start of 2022, weighed by rising treasury yields and expectations that the Fed may kick off a rate-hiking cycle as early as March. US inflation hit a four-decade high of 7% in December, spurring concerns about wage inflation and its ramification for corporate earnings.

Rising price levels have had a negative impact on banks’ earnings. Although some have managed expenses well, the others have not. JPMorgan, Citibank, and Goldman Sachs highlighted rising expenses in their earnings call, with higher labor costs squeezing net profit margins.

The financial sector generally underperformed last week, setting a sour tone for the broader market. Netflix also disappointed investors by giving much lower-than-expected guidance for new subscribers in the coming quarter.

Looking ahead, around 22% of the S&P 500 companies are reporting results this week. Those include big tech names such as Apple, Microsoft, and Tesla, which account for around 6.2%, 5.2%, and 2.2% of the S&P 500 index weighting, respectively. Therefore, their results are likely to have an out-sized impact on market sentiment and will set the tone for the Nasdaq 100 index.

Source: Bloomberg, DailyFX

According to Factset, the S&P 500 is expected to deliver a broad earnings growth rate of 21.8% year-over-year for the fourth quarter, marking the fourth straight quarter of earnings growth above 20%. The actual growth rate could be even higher as the majority of corporate America tends to give conservative EPS forecasts in an attempt to engineer positive surprises when realized results are published.

Higher EPS readings may effectively bring down the price-to-earnings (PE) ratio for the S&P 500, Nasdaq 100, and Dow Jones, cushioning their downside potential.

Major US Earnings EPS Forecast: Week of Jan. 24-28

Source: Bloomberg, DailyFX

Apple

• EPS of $1.903 and revenue of $119.2 billion expected for Q4.
• Apple may highlight supply chain challenges due to the impact of Omicron on factories’ operations.
• Demand for the iPhone 13 remains robust, but the company’s ability to fulfill orders remains in question.
• Services revenue is expected to remain strong, and it could offset some of the weakness on the products side of the business.
• Apple is trading at 29.34 times earnings (P/E), far above its five-year average of 22.51.

Microsoft

• EPS of $2.316 and revenue of $50.88 billion expected for Q4.
• The degree of sales outperformance could soften when the company reports results as growth companies face a tougher backdrop in Q4.
• Sales in the cloud business may slow down as the recent increase in COVID-19 cases means lower demand from clients in the service sector.
• The proposed acquisition of Activision will be in focus during the earnings call.
• Microsoft is trading at 36.47 times earnings (P/E), above its five-year average of 27.5.

Tesla

• EPS of $2.309 and revenue of $16.6 billion expected for Q4.
• It could be another strong season for sales, as the company’s deliveries surged about 87% from a year ago in the fourth quarter.
• Demand for product is robust as Tesla is likely to remain the primary BEV choice for most of 2022.
• A potential delay in the launch of the Cybertruck, a semiconductor shortage and supply-chain issues will be in focus.
• Tesla is trading at 320 times earnings (P/E).