Insight into Earnings Trends
The second-quarter earnings season has unveiled a financial panorama showcasing a blend of stability and enhancement in the earnings landscape. Corporate executives have presented a reassuring perspective on the economic backdrop, although estimates for the current period are displaying signs of erosion at a swifter pace compared to previous quarters.
Current Earnings Overview:
When examining Q2 holistically, total earnings for the index are poised to rise by +9.4% from the corresponding period last year, propelled by a +5.4% surge in revenues. Anticipated earnings growth marks the most robust pace since the initial quarter of 2022.
Q3 Projections:
For the upcoming 2024 Q3, total S&P 500 earnings are predicted to ascend by +4.3% from the prior-year period supported by a +4.6% increase in revenues. However, glitter from these projections has dulled slightly since the quarter commenced, with the existing +4.3% earnings growth forecast retreating from an early July figure of +6.9%.
Sectoral Analysis:
Notably, the negative revision wave in Q3 is notably more robust compared to analogous periods in the two preceding quarters. Projections have been revised downward across 14 of the 16 Zacks sectors, with the Energy, Medical, Transportation, and Business Services sectors experiencing the most substantial contractions. Conversely, the Tech and Finance sectors have witnessed upward revisions.
Perusing the ‘Magnificent 7’ — comprising Microsoft, Alphabet, Amazon, Apple, Meta Platforms, Tesla, and Nvidia — these tech behemoths faced harsh market scrutiny amidst recent perturbations. Market sentiments were largely unimpressed by the Q2 quarterly disclosures from these companies, particularly Alphabet, Microsoft, Amazon, and Tesla.
Market apprehension regarding the Mag 7 entities stemmed not from their current earnings or forthcoming forecasts, but from their escalating capital expenditure (capex) levels channeled into AI initiatives. Stakeholders clamor for clearer monetization pathways for these AI investments, a clarity that management teams have struggled to offer in full measure.
However, the soaring capex by tech heavyweights including Alphabet, Microsoft, and Amazon should not stir grave concerns. These investments underpin their position at the vanguard of a burgeoning business domain.
The Capacity of Tech Giants:
Within the broader Tech sector, Q2 earnings are expected to surge by +20.6% from the corresponding period last year. A continued streak of favorable revisions in the Tech sector carries weight, given that this segment alone is poised to contribute nearly 30% of total S&P 500 earnings in the coming four-quarter cycle.
The long-range trajectory for Tech sector earnings foresees a +17.6% uptick for 2024, paving the way for another robust showing in the subsequent year. This thematic ascendancy is vividly captured in the evolving aggregate earnings narrative of the Tech sector over the past year.
The Profit Outlook:
Forecasts paint a hopeful portrait for Tech sector margins, with 2024 margins projected to surpass the record levels achieved in the preceding year. This upbeat sentiment hints at additional gains in the subsequent period, spurred by the expanding share of high-margin software and services in the Tech earnings spectrum, while also reflecting sanguinity about the transformative influence of AI on sectoral efficiency.
Zooming Out on Earnings:
The earnings prospects for the current term (2024 Q3) teeter towards a +4.3% surge from the equivalent period last year amid a +4.6% revenue uptick. Estimates have steadily descended since the quarter kick-off, as evidenced in the chart below.
Broad Earnings Outlook:
Contrasting the narrative to prior quarters, the present downswing in estimates casts a wider net and isn’t localized to specific sectors. The negative revision spree spans across 14 of the 16 Zacks sectors, underscoring a general contraction. Sole uplift is observed in the Tech and Finance sectors.
The overall quarterly earnings vista is lucidly delineated in the ensuing chart.