Earnings season is the next big test for the market and value stocks in the week ahead

Market focus in the coming week turns toward fourth-quarter earnings, which are expected to reveal stronger profit growth for economically sensitive stocks over tech names.

The earnings period could test a theory that value and cyclicals are set to outperform technology stocks. It will also be a time when investors get a first-hand look at how companies are dealing with inflation, which rose 7% on an annualized basis during the final month of 2021, as measured by the consumer price index.

“Earnings are expected to come in at 20% earnings growth year-over-year. The companies will probably beat that… and will come in at 25% to 30%,” said Jonathan Golub, Credit Suisse chief U.S. equity strategist.

“It’s totally skewed with about 20% of the market — the cyclical sectors energy, materials, industrials, discretionary — together expected to grow 95% to 100%,” he added. “Everyone is expected to do better than tech.”

According to Golub’s estimates, the S&P technology sector is expected to grow earnings by just 11%.

“Energy, materials, industrials, these old economy companies are expected to deliver much better earnings growth and not only now,” but in subsequent quarters, he said.

The materials sector is expected to see earnings grow by 62% and industrials by 52%. Energy profits will be up sharply since they come off negative numbers last year. Consumer discretionary, minus internet retail, is expected to have earnings growth of 33.9%. Financials, while also deemed cyclical stocks, are expected to see profits up just 2%.

“When you have inflation at these levels, there are companies that naturally win and others that don’t. These are the companies that are the biggest beneficiaries of inflation. This is an inflation story,” Golub said. “When you look at where the excitement is in the market, you should not be looking at tech companies. They’re not bad with 10% growth this year. That’s fine, but others are doing much better.”

Earnings forecast revisions have also favored cyclical sectors, Golub said. Growth estimates for the cyclicals are up 9.5% since September, but tech sector earnings estimates are down 1.6%.

Several major banks reported Friday, and the earnings season gets busier in the week ahead with a range of sectors. Financials, like Goldman Sachs, Travelers and Bank of America report, as does Netflix and consumer brand giant Procter & Gamble. There are also of results coming from transportation companies, including J.B. Hunt Transport Services, United Airlines and Union Pacific.

While Citigroup, Wells Fargo and JPMorgan, beat estimates when they reported Friday, their stock performance was mixed. JPMorgan fell more than 6% Friday on its disappointing outlook, which included a warning about headwinds from wage inflation.

“I think we’ll get real clarity from a lot of industrial and cyclical type of companies, and whether they are able to weather price pressures and supply chain issues, and I think the well-managed ones will be fine,” said Steve Sosnick, chief strategist at Interactive Brokers.

Stocks tied to bonds

Sosnick said he expects technology will remain tethered to any sharp moves in the 10-year Treasury , which was at about 1.77% Friday, below its recent high of 1.8%.

The 10-year yield, which rises when the bonds sell off, made a big move higher early in the year as the Federal Reserve reiterated its hawkish stance. The central bank revealed that it discussed shrinking its balance sheet at its December meeting. That could potentially add further policy tightening, from a Fed that is already forecasting three interest rate hikes this year.

Technology performed better than industrials and materials, which were each down about 1% for the week. Tech was off about 0.6% for the week, and it was also outperforming financials, which slid 1.3%.

The Nasdaq was off about 1% for the week as of Friday afternoon, while the S&P 500 was down 0.8%.

The Treasury market could be a little quieter in the week ahead, with markets closed Monday for Martin Luther King Jr. Day.

Michael Schumacher of Wells Fargo, said Fed officials have now entered the quiet period ahead of their Jan. 25-26 meeting.

“The 10-year and 30-year [Treasury] auctions are out of the way. It seems to us the big catalysts have happened for the near term. We do think it will be quiet next week,” said Schumacher. “My guess is the 10-year sits. It’s at least a respite for stocks.”

There are a few economic reports on the calendar, including the Fed’s Empire state manufacturing survey Tuesday and the Philadelphia Fed manufacturing survey Thursday. Existing home sales are also reported Thursday.

Sosnick expects the volatility to continue and tech will remain under fire. “I think what we’re seeing is growth at any price is going back to growth at a reasonable price,” he said.

Week ahead calendar

Monday

Markets closed for Martin Luther King Jr. Day

Tuesday

Earnings: Goldman Sachs, Charles Schwab, Bank of New York Mellon, Truist Financial, J.B. Hunt Transport, Interactive Brokers

8:30 a.m. Empire State manufacturing

10:00 a.m. NAHB survey

4:00 p.m. TIC data

Wednesday

Earnings: Bank of America, Procter & Gamble, UnitedHealth, US Bancorp, Morgan Stanley, Alcoa, United Airlines, Discover Financial, FNB, Fastenal, Citizens Financial, Prologis, State Street, Comerica

8:30 a.m. Housing starts

8:30 a.m. Business leaders survey

Thursday

Earnings: Netflix, Travelers, Union Pacific, American Airlines, Baker Hughes, Fifth Third, Intuitive Surgical, Northern Trust, CSX, Regions Financial, PPG Industries

8:30 a.m. Initial jobless claims

8:30 a.m. Philadelphia Fed manufacturing

10:00 a.m. Existing home sales

Friday

Earnings: Schlumberger, Ally Financial, Huntington Bancshares