HSBC flags discounted stocks as earnings estimates rise ahead of reporting season

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HSBC eyes discounted stocks

Highlights

HSBC identifies 24 stocks, including Netflix and T-Mobile, with rising forward EPS estimates but falling share prices and discounted valuations before Q2 earnings.
FactSet data shows energy and information technology sectors are set to lead S&P 500 Q2 EPS growth at 122% and 61% respectively, with Mag 7 group projected at 30% growth.
Netflix's forward estimates rise 12% while shares drop 21% in three months, and T-Mobile's estimates rise nearly 9% as shares fall almost 12%, putting both stocks at historic low valuations.

HSBC screen highlights valuation gaps before results

As reported by CNBC, HSBC Global Investment Research says Wall Street analysts are raising earnings estimates for a range of stocks even as their share prices slump, leaving more attractive valuations heading into second-quarter earnings season.

Nicole Inui, head of Americas equity strategy at HSBC Global Investment Research, says expectations for the quarter are high but concentrated in sectors where earnings visibility is relatively strong. Consensus estimates call for S&P 500 earnings per share to rise 22% from a year earlier, the strongest growth since the post-pandemic period.

Inui says she is not overly concerned about elevated expectations because much of the expected profit growth is concentrated in energy, semiconductors and tech hardware suppliers, where earnings are more predictable. Outside those areas, her analysis shows earnings are expected to grow about 5%, well below the roughly 24% recorded in the first quarter.

HSBC's screen identifies 24 stocks where earnings estimates are revised higher even though valuations appear discounted and share prices have fallen. For Netflix, forward earnings estimates rise 12% over the past three months while the stock falls 21%, and HSBC says its valuation now sits at the low end of its historical range. T-Mobile shows a similar pattern, with forward EPS estimates up nearly 9% over the past three months as the shares drop almost 12%, also leaving its relative valuation near the bottom of its historical range.

Sector leadership and catalysts beyond AI

Energy and information technology are expected to lead second-quarter growth, based on FactSet data used by HSBC, with EPS growth of 122% and 61%, respectively. The Mag 7 group, Amazon, Alphabet, Microsoft, Tesla, Nvidia, Meta Platforms and Apple, is expected to post earnings growth of about 30%, while earnings before interest and taxes probably expand by about 34%, reinforcing the AI spending theme.

Healthcare is the only sector expected to report weaker earnings, led by pharmaceutical companies, though Inui says low expectations may still create openings. She also points to possible upside in consumer staples, industrials and autos, where tariff refunds could provide support, while FIFA World Cup-related spending may benefit beverage and travel businesses.

Netflix remains under pressure after underwhelming forward guidance in April, uncertainty around its unrealized bid for Warner Bros. Discovery and the departure of co-founder and former chairman Reed Hastings. The Wall Street Journal reported last week that the company discusses adding live television channels and explores bundling its service with other streaming products; Netflix is scheduled to report second-quarter results on Thursday after the market closes.

T-Mobile, meanwhile, reports a strong first quarter with 217,000 postpaid net account additions, up 6% from a year earlier. In April, the wireless carrier announces two strategic fiber partnerships to expand broadband access across Northeastern markets, and it is scheduled to release second-quarter earnings on July 23.

In our earlier coverage of the second-quarter earnings setup, we examined how rapidly rising S&P 500 profit forecasts have collided with a sideways market, compressing the forward P/E as investors question how much of the earnings surge is already priced in. We also noted that AI-driven capex is concentrating profit momentum in semiconductors and hyperscalers while reshaping earnings quality, which can restrain index-level multiples even as estimates move higher across select sectors.

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