Earnings season plays: Profit expectations are growing for these stocks while their valuations get cheaper

Wall Street analysts are raising earnings estimates for a host of stocks that have seen slumping share prices, leaving 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 concentrated in sectors where earnings visibility is relatively strong. She sees opportunities beyond the artificial intelligence trade, including companies that could benefit from tariff refunds and spending tied to the FIFA World Cup.

Consensus estimates call for S&P 500 EPS to rise 22% from a year earlier, the strongest growth since the post-pandemic period.

Historically, companies that beat earnings estimates see only modest stock gains, while those that miss tend to fall more sharply. Still, Inui is not overly concerned because much of the quarter's expected earnings growth is forecast to come from energy, semiconductor and tech hardware suppliers, where earnings are more predictable.

Outside those areas, her analysis shows that earnings are expected to grow about 5%, far below the roughly 24% seen in the first quarter.

Energy and information technology are expected to lead, according to FactSet data used by HSBC, logging EPS growth of 122% and 61%, respectively,

The Mag 7 (Amazon, Alphabet, Microsoft, Tesla, Nvidia, Meta Platforms and Apple) as a group are expected to post earnings growth of about 30%, while earnings before interest and taxes will probably expand by about 34%, continuing to support the AI spending narrative.

Healthcare is the only sector expected to report weaker earnings, led by pharmaceutical companies, though Inui sees opportunities, given low expectations.

AI and tech earnings will remain the market's focus, while still providing possible surprises.

Consumer staples stocks, industrials and sectors such as autos, could get a boost from tariff refunds. Spending tied to the FIFA World Cup may have supported consumer-friendly sectors such as beverage and travel businesses.

HSBC ran a screen that found 24 stocks where "earnings have been revised higher, yet valuations appear discounted and share prices have dropped."

For Netflix , forward earnings estimates increased 12% in the past three months at the same time as the shares fell 21%. Netflix has plunged 40% over the past 12 months, leaving Netflix's valuation at the very low end of its historical range, HSBC said.

Shares of Netflix have plunged almost 42% over the past year as the streaming platform issued underwhelming forward guidance in April, contended with uncertainties tied to its unrealized bid to acquire Warner Bros. Discovery and the departure of co-founder and former board of directors chairman Reed Hastings.

The Wall Street Journal last week also reported the dominant streaming platform has discussed adding live television channels to its offerings and explored bundling its product with other streaming services. Netflix is scheduled to announce second-quarter results Thursday post-market.

T-Mobile appears to have a similar disconnect. Its forward EPS estimates increased by nearly 9% over the past three months at the same time as the stock dropped almost 12%, once again leaving its relative valuation at the very bottom end of its historical range, HSBC said.

Estimates rose after the wireless carrier reported a strong first quarter, achieving 217,000 postpaid net account additions, a 6% increase from 205,000 a year earlier. In April, T-Mobile also announced two strategic fiber partnerships to strengthen its broadband portfolio and expand fiber access across the Northeast, and reported a postpaid average revenue per account (ARPA) of $151.93, up nearly 4% from $146.22 a year earlier.

T-Mobile is scheduled to release second-quarter earnings on July 23.