Investment Strategy Brief
In the Early Innings of Earnings Season
October 13, 2024
Executive Summary
- Q3 earnings season is set to kick into gear this week, with expectations for mid-single-digit growth for the S&P 500.
- Another quarter of strong Magnificent 7 earnings highlights falling earnings growth breadth in Q3, but that may soon give way to broader fundamental improvement.
- Earnings growth has been a sliding scale along the cap spectrum so far, but that script may flip in 2025, favoring small caps.
- The prospect for broader earnings growth participation should favor small caps and investment processes that lean against market concentration.
Q3 earnings season is now underway, with expectations for modest growth in aggregate
%202024-10-14-1.png?width=2000&height=1900&name=IS%20Brief%20Chart%201%20(Left%20Panel)%202024-10-14-1.png "IS Brief Chart 1 (Left Panel) 2024-10-14-1")
%202024-10-14.png?width=1987&height=2000&name=IS%20Brief%20Chart%201%20(Right%20Panel)%202024-10-14.png "IS Brief Chart 1 (Right Panel) 2024-10-14")
Shown in the left panel is a timeline of the cumulative share of the S&P 500’s market capitalization that has reported Q3 2024 earnings results. Shown in the right panel is the blended growth in earnings per share for the S&P 500 and its 11 constituent sectors for Q3 2024 on a year-over-year, percent change basis. Blended growth figures combine actual results with consensus expectations for companies that have yet to report. The S&P 500 is a market capitalization weighted index of large cap stocks in the U.S. Actual results may differ materially from expectations. One cannot invest directly in an index.
- While a handful of companies in the S&P 500 have already reported Q3 results, earnings season really starts to kick into gear this week.
- The S&P 500 is expected to deliver mid-single-digit earnings growth on a year-over-year basis, led by the technology, health care and communications services sectors.
Equity markets are seeing through Q3 to more plentiful earnings growth ahead
%202024-10-14.png?width=2000&height=1904&name=IS%20Brief%20Chart%202%20(Left%20Panel)%202024-10-14.png "IS Brief Chart 2 (Left Panel) 2024-10-14")
%202024-10-14.png?width=2000&height=1988&name=IS%20Brief%20Chart%202%20(Right%20Panel)%202024-10-14.png "IS Brief Chart 2 (Right Panel) 2024-10-14")
Data shown in the left panel are the quarterly share of stocks in the S&P 500 that are seeing positive earnings growth on a year-over-year basis. Solid bars represent actual results and hashed bars represent projections based on bottom-up equity analyst estimates. Shown in the right panel are rolling 3-month total returns for the S&P 500 in its market cap weighted variant in blue and its equal weighted variant in green. Past performance may not be indicative of future results. Actual results may differ materially from expectations. One cannot invest directly in an index.
- Through Q2, the S&P 500 has seen gradually improving breadth in the number of its constituents experiencing year-over-year growth, but that process may be put on pause in Q3.
- Investors appear to be seeing through this blip in breadth to more plentiful results in Q4, in which almost 70% of constituents are expected to deliver earnings growth.
Another quarter of strong Magnificent 7 earnings may soon give way to broader fundamental improvement
Data shown are quarterly earnings per share growth rates on a year-over-year percent change basis. Figures in blue represent the results for the Magnificent 7 (Apple, Microsoft, Amazon, Alphabet, Nvidia, Meta, Tesla) and figures in green represent the rest of the stocks in the S&P 500 index. Solid bars represent actual results and hashed bars represent projections based on bottom-up equity analyst estimates. Past performance may not be indicative of future results. Actual results may differ materially from expectations. One cannot invest directly in an index. References to specific stocks should not be construed as advice to buy, hold or sell individual securities.
- The Magnificent 7’s earnings growth has not missed a beat over the past year, surging ahead while the rest of the index faced an earnings recession.
- A process that sees a broader set of companies participating is expected to pick up in Q4, as the results for the Magnificent 7 and the rest of the S&P 500 are expected to begin converging.
Earnings growth has been a sliding scale along the cap spectrum so far, but that script may flip in 2025
Data shown are the year-over-year growth rates in quarterly earnings for several equity indices. Solid bars represent actual results and hashed bars represent projections based on bottom-up equity analyst estimates. Past performance may not be indicative of future results. Actual results may differ materially from expectations. One cannot invest directly in an index.
- Mega cap stocks have led the way on earnings growth so far this year, but small cap earnings are expected to rebound materially in 2025.
- The combination of favorable earnings prospects, fair valuations and a new Fed rate cut campaign favor portfolio tilts in favor of small cap stocks.
For more in-depth information on this topic, please reach out to your Glenmede Relationship Manager.
This material is intended to review matters of possible interest to Glenmede Trust Company clients and friends and is not intended as personalized investment advice. When provided to a client, advice is based on the client’s unique circumstances and may differ substantially from any general recommendations, suggestions or other considerations included in this material. Any opinions, recommendations, expectations or projections herein are based on information available at the time of publication and may change thereafter. Information obtained from third-party sources is assumed to be reliable but may not be independently verified, and the accuracy thereof is not guaranteed. Outcomes (including performance) may differ materially from any expectations and projections noted herein due to various risks and uncertainties. Any reference to risk management or risk control does not imply that risk can be eliminated. All investments have risk. Clients are encouraged to discuss any matter discussed herein with their Glenmede representative.
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