Earnings Watch: The earnings recession is expected to end after some big profit surprises

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An end to the earnings recession now seems likely as holiday-season profits have come in better than expected.

After the S&P 500 SPX, -0.54%  recorded three straight quarters of declining net income to start 2019, FactSet now expects that profits will grow in the fourth quarter, with about two-thirds of results already announced. That wasn’t the expectation just a few weeks back, when analyst estimates on the whole were calling for another quarter of net-income declines and thus a continuation of the earnings recession, which occurs when profit falls for two or more quarters in a row.

FactSet now models blended profit growth of 0.7% for the index, taking into account already reported results as well as estimates for companies that have yet to deliver quarterly financials. A week ago, the model was still calling for a slight drop in earnings, but big profit surprises from insurers MetLife Inc. MET, -0.56%  and Allstate Inc. ALL, +0.44%  in recent days helped swing the blended projection into positive territory.

Earlier in the reporting season, projections were even more pessimistic, but behemoths like Amazon.com Inc. AMZN, +1.42%  and Apple Inc. AAPL, -1.36% exceeded earnings expectations during the fourth quarter and helped to outweigh drags on the index like Boeing Co. BA, -1.37% , Chevron Corp. CVX, -0.50%  and Exxon Mobil Corp. XOM, -0.66%  .

The week ahead brings 66 more reports, including from Nvidia Corp. NVDA, -1.04%  and Cisco Inc. CSCO, -1.48% , and by the end of the week nearly 80% of the index will have posted results. The final test lurks in the weeks that follow, as retail companies take the stage and report on their holiday quarters.

Here’s what to watch for in the week ahead:

Cisco to represent the Dow

Networking giant Cisco is the only Dow Jones Industrial Average DJIA, -0.94%  component on the weekly docket and investors will be looking to the company’s results as yet another read on the corporate spending landscape. Raymond James analyst Simon Leopold isn’t too worried, however, writing that the company is the “miner and not the canary,” meaning that its macro concerns three months back may have been a lagging indicator. He saw signs of strong enterprise demand in December that “more than offset” weakness in November.

Cisco posts results Wednesday afternoon, and rival Arista Networks Inc. ANET, -0.32%  follows a day later.

Chip shots

Nvidia is the biggest chip name of interest in the week ahead, and its results come on the heels of a disappointing forecast from competitor Advanced Micro Devices Inc. AMD, +0.83%  . The good news for Nvidia is that the company faces easier comparisons this time around and analysts predict a return to revenue growth. The company is on the schedule for Thursday afternoon.

Full Nvidia preview: A return to revenue growth expected after a rough year

Elsewhere in the chip sector, Applied Materials Inc. AMAT, -2.34%  will be the last big chip-equipment company to deliver its numbers when it faces investors Wednesday afternoon. Despite optimism about wafer-fab equipment spending, Applied’s shares have been near flat so far this year and they lagged behind peer stocks last year, so management will be looking to set an upbeat tone.

The beginning of retail earnings

Some early glimpses of retail results will come Tuesday, when Hasbro Inc. HAS, -2.68%  and Under Armour Inc. UA, -2.34% UAA, -2.03%  report their financial results.

On Hasbro, Wells Fargo analyst Timothy Conder will be focused not just on what happened in the lead-up to the holidays, but also on what transpired after. “We remind investors that the two weeks following Christmas have become increasingly important (returns/redemption of gift cards) over the past few years,” he wrote.

Under Armour’s annual forecast will be key as the company navigates the competitive landscape for athletic apparel. Wedbush’s Christopher Svezia flags that Dick’s Sporting Goods Inc. DKS, -3.70%   is ramping up its private-label selection domestically, while brands like Nike Inc. NKE, -0.83%, Puma, and Vans “continue to outperform” internationally.

Alibaba Group Holding Ltd. BABA, -1.98%  is set to report numbers before the opening bell Thursday, and management will likely face questions about how the coronavirus outbreak is impacting demand. As for the December quarter, Instinet’s Jialong Shi recently wrote that overall e-commerce sales were slower on a year-over-year basis during the period than they were in the third quarter, “likely owing to soft apparel growth, hit by the warm winter.”

Smooth ride?

All signs point to a more “rational” ride-hailing market, which could benefit Lyft Inc. LYFT, +5.27%  as the two big ride-hailing giants aim for profitability. Lyft’s Tuesday afternoon report follows rival Uber Technologies Inc.’s UBER, +9.54%  numbers a few days earlier. Investors seemed to like Uber’s talk of balancing growth with profits, and investors will be looking to see if Lyft’s management takes a similar approach. Lyft has a more narrow business model than Uber, but growing engagement and revenue per rider remain key.

A few staples

Wall Street will also get a read on consumer staples, with Kraft Heinz Co. KHC, +1.65%  and PepsiCo. Inc. PEP, +0.72%  on the docket for Thursday. Their stocks have enjoyed much different fates over the past year, and Kraft will be looking to turn things around after announcing a sizable impairment charge and hundreds of job cuts in the latter part of 2019.

Pepsi shares have outperformed the S&P 500 over the past year, but Evercore ISI analyst Robert Ottenstein wrote back in December that he expects the company “will struggle to maintain share in…North America beverages” given Coca-Cola Co.’s KO, +0.34%  “aggressive growth agenda.” Investors will be looking for indications of how Pepsi intends to respond.

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