The biggest risks posed to a historic earnings season

Data out from Bank of America shows that about 70% of companies that reported their fourth-quarter earnings have beat Wall Street estimates, above the historical average of 63%. While earnings season has been mainly positive so far, is it enough to keep up the recent rally in the market?

Niladri Mukherjee, TIAA Chief Investment Officer of the Wealth Management Division, joins Yahoo Finance to discuss the latest earnings season and the risks posed to the stock market's recent positive run.

"If you look at the top ten stocks in the S&P 500, they're more than 30% of the index now, and those same top ten names are contributing roughly 20% to 23% to the earnings of the S&P. They're punching above their weight slightly, but not too much," Mukherjee explains, adding: "But, I do think the concentration risk is there. The biggest thing for the markets this year is going to be the Fed rate cuts. Earnings is number one. Fed rate cuts is number two."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

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SEANA SMITH: Uncertainty over the timing of the first Fed rate cut has put investors on edge. But there's one area that's helping to reassure the street, and that's fourth quarter earnings. Now, 2/3 of the S&P 500 companies have reported results so far. And data out, from Bank of America, showing that over 70% of companies that have reported have beat-- that's above the historical average.

We want to bring in Nil Mukherjee. He is at TIAA wealth management division's chief investment officer. Nil, it's great to have you here at the desk with us. Let's talk about earnings focus right now, in terms of the reports that we've gotten so far. Better than expected, at least when you take a look most-- as a wider look at the majority of earnings that we've gotten. Is that enough, though, to keep the market's momentum intact?

NILADRI MUKHERJEE: Yeah, it's a great question because all of 2023 was about valuations. And this year, the focus is going to be on earnings. And earnings better deliver for the stock market to move forward. And like you said, earnings are coming in better than expected. That's great news.

It's still tracking, roughly, mid to low single digit, in terms of sales growth, earnings growth. So it's not that stellar. But it's better than expected.

The key question here is, does technology keep powering through with their earnings growth? And they have been the biggest contributor to earnings in the fourth quarter. They're expected to be the biggest contributor in Q1 as well. If technology doesn't deliver on their promised earnings, and they don't deliver better than expected, I think, in 2024, that could be volatile for earnings as well as the stock market.

One swing factor, I know the consensus is pricing in about 10% earnings growth, is the cyclical sectors. If they begin to participate, there could be more upside.

BRAD SMITH: What's the specific area within technology, though, that needs to stay strong in order for the rest of the market to just kind of hang on the coattails for the--

NILADRI MUKHERJEE: Well, I think it's the secular growth areas really. So within technology, we still like software, we like areas like cybersecurity, artificial intelligence, cloud computing.

Cloud computing, remember if you go back a few years ago, everybody was talking about cloud computing. And now it's being replaced by artificial intelligence. But go back to cloud computing, we may be in the fifth inning, here in the US, in terms of companies transforming to the cloud because it lowers their expenses. Outside the US, we're in the first inning. So this is a long-term theme. So those are the areas that we would focus on.

Technology, a little bit extended. We're being selective. We're favoring those names which have rock solid balance sheets and they have access to those total addressable markets that I talked about.

SEANA SMITH: Yeah, one of the criticisms of the market's momentum that we've seen, obviously, is that a lot of that has been driven by just a handful of tech names. We started to see a little bit more of a broadening out in participation. If we don't see more of that ahead here in 2024, what risk do you think that poses to the market?

NILADRI MUKHERJEE: It does pose a risk because if you look at the top 10 stocks in the S&P 500, they're more than 30% of the index now. And those same top 10 names are contributing roughly 20%-- 20 to 23% to the earnings of the S&P. So they're punching above their weight slightly but not too much because the growth rates are pretty stellar in those areas, which is why I said they'd better deliver on those growth rates for the markets to do well. But I do think the concentration risk is there. The biggest thing for the markets this year is going to be the Fed rate cuts. Earnings is number one, Fed rate cuts is number two.