The Strategist

S&P 500 Q2 2024 earnings season wrap-up: smallest beat since late 2022

Equity markets experienced some turbulence and increased volatility during the second quarter 2024 earnings season, making it somewhat difficult to interpret the reaction of individual stocks to the results. We take a closer look at what happened and come to three key conclusions: The growth gap between the broad market and the "Magnificent Seven" is starting to narrow, large-cap earnings are beating small-cap earnings by a wide margin, and the defensive space of the market has started to catch up.

Date: 14 août 2024
Auteur: Philipp Lisibach, Head Research & Strategy LGT Private Banking, Georg Ruzicka, Head Equity Research EMEA
Temps de lecture: 10 minutes

Earnings Season Wrap-Up — © Shutterstock

The much-anticipated Q2 earnings season is drawing to a close with more than 90% of S&P 500 companies having reported their financial results. Looking at the US’ bellwether index, the S&P 500, earnings remain on track, with 9.3% earnings growth for the second quarter of 2024 in aggregate for those companies that have reported, and a blended 10.8% year-over-year growth including consensus estimates for those companies that have not yet reported their results (all numbers compiled by Bloomberg/Factset). Some 78% of companies that have reported have beaten the consensus earnings estimate, with aggregate earnings exceeding expectations by around 2%, the smallest beat since the fourht quarter 2022. However, corporate guidance ratios remained solid, with significantly more companies guiding above consensus than below. Looking at revenue, around 59% of companies beat revenue expectations, which is broadly in line with the historical averages, with an aggregate revenue beat of approximately 0.8%. Also, the second quarter marks the 15th consecutive quarter of revenue growth for the index.

Selected defensive sectors show the strongest beats

Defensive sectors delivered the bulk of the earnings beats, with defensives outperforming earnings growth of cyclicals by around three percentage points, the first beat since the first quarter 2021. The utilities sector reported the highest year-on-year earnings growth rate of all eleven sectors at 20.4% for Q2 2024, some 9.3% ahead of consensus expectations, clearly helped by a net profit margin expansion from 11.8% in the prior year’s quarter to now 13.7%. The second-best beat was delivered by health care (8.5%). Only one sector had an overall negative aggregate earnings surprise: the communications services sector came in approximately 12% below expectations. This was due to one particular company in the entertainment industry, Warner Brothers, which decided to take a substantial write-down charge of USD 9 billion on TV networks, reflecting the accelerating transition from traditional TV to digital streaming platforms. The solid earnings delivery by defensive sectors is also reflected in sector leadership over the past month, with three out of the four best performing sectors being defensive (i.e. Utilities, Health Care and Consumer Staples), while the top three worst performing global sectors were cyclical in nature (i.e. Technology, Consumer Discretionary and Materials).

Price reaction muted and asymmetric

As equity markets experienced some turmoil and elevated volatility during parts of the earnings reporting season, the individual stock reaction to the results may be muddled and difficult to interpret. Nevertheless, for those companies that reported a positive surprise, the price reaction from two days before to two days after reporting was -0.8%, to capture a holistic reaction, which is below the five-year average of +1.0%. This more muted reaction to positive surprises suggests that expectations were high, even if official consensus earnings estimates did not capture all this enthusiasm. Large technology companies in particular have faced high expectations, after the strong market rally this year. Negative earnings surprises, on the other hand, have been severely punished, with an average market reaction of -3.8%, compared to a five-year average of -2.3%.

"Mag 7" vs. the remaining S&P 493

Six of the seven members of the so-called "Magnificent Seven", a group of large and prominent technology companies, have reported their results so far. NVIDIA will be posting its quarterly results on 28 August. Five of the six companies that have reported their results have beaten their consensus earnings estimates by an average of 6%. Only Tesla fell short of expectations with earnings coming in 13.6% below estimates. The stock price reaction, however, was fairly similar across the group and suggests that the "Magnificent Seven" failed to impress investors. Tesla saw its stock price fall by 10.6% in the two days following its earnings release. Five of the six companies that reported positive surprises also experienced a share price decline by an average of 8% in the three days post earnings release, and only Meta Platforms, formerly known as Facebook, saw its shares rise moderately (+2.8%). High expectations, some concerns about the pace of monetisation of Artificial Intelligence (AI) investments, a lack of strong positive forward guidance updates, and the overall market turbulence may have contributed to the lacklustre price reaction. However, the S&P 493 - so to speak - managed its profit turnaround and delivered earnings growth of 8% year-on-year, the first positive growth rate since Q4 2022.

Earnings expectations going forward

Overall, earnings momentum for Q2 2024 shows a positive delivery at aggregate levels, with a beat by some 2% and a firm corporate guidance ratio. Looking ahead, only a few sectors have seen positive earnings revisions for the third quarter 2024 over the past four weeks, with Utilities in the lead, followed by Financials, Materials and Health Care. All the other sectors have seen negative earnings momentum, the most pronounced in Industrials and Consumer Discretionary, two very cyclical sectors. For the third quarter, earnings expectations have been revised down by roughly 2% since 30 June, which is in-line with historical post-reporting season revision ratios. For the third quarter of 2024, analysts now project earnings growth of 5.4% and revenue growth of 4.9%, followed by an expected re-acceleration into Q4 2024, with projected earnings growth of 15.7% and revenue growth of 5.4%. For the full year 2024, analysts are forecasting earnings growth of 10.2% and revenue growth of 5.1% compared to 2023.

The three most important takeaways

First, earnings growth has really broadened, with the S&P 493 posting its first positive profit growth since Q4 2022. In other words, the growth gap between the broad market and the "Magnificent Seven" has started to narrow, with the broad market accelerating from downbeat levels and the "Magnificent Seven" decelerating against a very high comparison base. Second, large-cap earnings beat small-cap earnings by a wide margin. Earnings growth in the S&P 600 - a small cap index - is so far coming in at a run-rate of -14% (although only around 25% of the small caps have reported to date). This is also reflected in guidance ratios, where confidence among large caps is much higher than among small caps. The gap between large and small company sentiment is the widest it has been in some 20 years. And third, the defensive space of the market has started to catch up. Among other things, this was the space partly seen as "bond proxy" - and therefore suffered from high interest rates, which have now started to come down. In addition, the earnings growth performance of defensive sectors has clearly improved against their cyclical peers. We are currently favouring a defensive tilt in our sector strategy, e.g. with an "Overweight" in Utilities and Health Care against an "Underweight" in Financials and Consumer Discretionary. Energy remains our only overweighted cyclical sector at this stage, supported by low valuations and a high total shareholder payout. Finally, we continue to view the Energy sector as a potential "geopolitical hedge".

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