Wall Street analysts are raising earnings estimates for many struggling stocks, leaving them with more attractive valuations heading into second-quarter earnings season. Nicole Inui, head of Americas equity strategy at HSBC Global Investment Research, said expectations for the quarter are high but focused on sectors with relatively strong earnings prospects. She sees opportunities beyond artificial intelligence trade, including companies that could benefit from tariff rebates and spending related to the FIFA World Cup. Consensus forecasts call for S&P 500 EPS to rise 22% year-over-year, the largest increase since the pandemic. Historically, companies that beat earnings expectations tend to see only modest increases in their stock prices, while companies that beat earnings expectations tend to see their stock prices fall even more sharply. Still, Inui isn’t too worried because much of the expected profit growth for the quarter is expected to come from suppliers of energy, semiconductors and high-tech hardware, whose profits are more predictable. Excluding these areas, her analysis shows that revenue is expected to grow by about 5%, well below the roughly 24% in the first quarter. Energy and technology lead According to FactSet data used by HSBC, energy and information technology is expected to lead, posting EPS growth of 122% and 61% respectively, with The Mag 7 as a group (Amazon, Alphabet, Microsoft, Tesla, Nvidia, Meta Platforms and Apple) expected to post earnings growth of around 30%, with earnings before interest and tax likely to be around 34% expansion and continues to support the AI spending narrative. Healthcare is the only sector where earnings are expected to slow, led by pharmaceutical companies, but Inui sees opportunity given lower expectations. AI and technology revenues will continue to be a focus for the market, but unexpected events may occur. Sectors like consumer staples, industrials and autos could get a boost from the tariff rebates. Spending related to the FIFA World Cup may have supported consumer-friendly sectors such as beverages and travel. HSBC’s research found 24 stocks whose “earnings have been revised upward, but valuations look cheap and share prices are falling.” Among the stocks that rose to the top were the following: In the case of Netflix, its stock price has fallen 21%, but its estimated earnings have increased 12% over the past three months. HSBC said Netflix has fallen 40% in the past 12 months, putting Netflix’s valuation at the very low end of its historical range. Netflix stock has fallen nearly 42% over the past year as the streaming platform announced underwhelming forward guidance in April as it grappled with an unrealized bid to acquire Warner Bros. Discovery and uncertainty surrounding the departure of co-founder and former board chairman Reed Hastings. The Wall Street Journal reported last week that the dominant streaming platform is discussing adding live TV channels to its service and considering bundling its products with other streaming services. Netflix is scheduled to release its second-quarter results after the market closes on Thursday. T-Mobile appears to have a similar disconnect. HSBC said its forward-looking EPS increased nearly 9% over the past three months, but the stock price fell nearly 12% in the same period, leaving its relative valuation once again at the low end of its historical range. Estimates rose after the wireless carrier reported a strong first quarter, adding 217,000 postpaid net accounts, up 6% from 205,000 in the year-ago period. In April, T-Mobile also announced two strategic fiber partnerships to strengthen its broadband portfolio and expand fiber access across the Northeast, and reported average revenue per postpaid account (ARPA) of $151.93, an increase of nearly 4% from $146.22 in the year-ago period. T-Mobile is scheduled to report second quarter results on July 23rd. — With additional reporting by CNBC’s Liz Napolitano
