Earnings Converging

Below is a transcript of this week’s video.

Hi, this is Jason Pride, Chief of Investment Strategy and Research at Glenmede.

Earnings season is in full swing this week. With around half of the S&P 500 reporting so far, the blended earnings growth rate, which combines actual results with consensus estimates for firms that have yet to report, currently stands at 3.3% on a year-over-year basis. However, there is significant dispersion around this modest growth rate between sectors, with strength in utilities, communications and tech offset by weakness in healthcare, materials and energy.

Four of the seven companies under the Magnificent 7 banner (i.e., Apple, Microsoft, Alphabet/Google, Amazon, Nvidia, Meta/Facebook, and Tesla) have already reported earnings results for the first quarter. This cohort is on pace to deliver more than 40% year-over-year earnings growth, which stands in contrast to -3% for the rest of the S&P 500. This is capping off a strong run of earnings results over the past year for the group, but that dominance may soon give way to broader fundamental improvement. For example, the Magnificent 7’s earnings growth projections of 14% for the 4^th quarter of 2024 actually lags the rest of the index’s 18%, as equity analysts appear to be anticipating more abundant opportunities for profit growth beyond the market darlings.

Looking back, 2023 was a tough year for earnings growth; U.S. large cap, European and emerging market equities saw their earnings grow very slightly, while U.S. small cap profits dropped 12%. Only Japanese equities posted notable gains of 8.5%. However, expectations are lining up for more solid growth from U.S. large and small cap, Japan and emerging markets in 2024, with bottom-up consensus estimates calling for greater than 10% growth for each of those. European equities remain the notable exception, with projections to grow earnings a mere 3%. Important to investors, these improvements in earnings should be a tailwind for most equity markets in 2024.

So to summarize, with almost half of companies reporting so far, the S&P 500 is on pace for low-single-digit earnings growth in the first quarter on a year-over-year basis. There is significant dispersion between sectors, with strength in utilities, communications and tech offset by weakness in healthcare, materials and energy. The Magnificent 7 are continuing a run of strong earnings results over the last year, with expectations for first quarter earnings growth greater than 40%. However, another quarter of Magnificent 7 earnings dominance may soon give way to broader, and arguably more healthy, fundamental improvement into the back half of 2024. This solid forward earnings growth from U.S. large and small cap, Japan and emerging markets should provide support to those respective equity asset classes.

Thanks for listening! And please don’t hesitate to reach out with any questions.