Connect with us

Bussiness

A look ahead to Q2 24 US earnings season – London Business News | Londonlovesbusiness.com

Published

on

A look ahead to Q2 24 US earnings season – London Business News | Londonlovesbusiness.com

Earnings season is upon us once more, with the Q2 reporting period set to kick-off with the banks from Friday 12th July.

As has become typical, market participants will pay close attention not only to incoming figures, and overall index/sector performance, but also to guidance issued for coming quarters, particularly with expectations having been – as is often the case – massaged lower throughout the quarter.

Per FactSet, S&P 500 earnings growth is seen at 8.8% on a YoY basis in Q2, marking the fourth consecutive quarter of growth for the index while also, if delivered, marking the highest rate of earnings growth since the first quarter of 2022.

Revenues, meanwhile, are seen rising 4.6% YoY for the S&P as a whole, marking the 15thstraight quarter of revenue growth for the index, with 9 of the 11 sectors set to report a YoY revenue increase.

Nevertheless, as has been the case for some time, the market continues to look ‘expensive’ per traditional valuation metrics. The S&P 500’s forward 12-month P/E ratio currently stands at 21.2, well above both the 5-year average of 19.3, and the 10-year average of 17.9. Furthermore, there remains an ‘earnings gap’, between the level at which the S&P 500 trades, and the index’s adjusted EPS.

In any case, and as s typical of reporting season, earnings expectations have been gently massaged lower throughout the quarter. On the whole, street EPS estimates for the S&P 500 fell around 0.5% over the three months to the end of June, though it is important to note that such a downward revision is somewhat lower than the 5-year average of 3.4%.

That said, while lower in magnitude than has been seen during recent reporting seasons, the gradual decline in earnings expectations once more reaffirms the importance of positive forward-looking guidance when it comes to unlocking a substantial post-earnings rally in individual stocks. It is, relatively speaking, easy for a firm to massage earnings expectations lower, and to then deliver a chunky beat; it is substantially harder to pull off the same trick when it comes to issuing guidance.

Meanwhile, at a sector level, while 9 of the S&P’s 11 sectors are set to report YoY revenue growth, 8 of the 11 are set to report YoY earnings growth. This includes 4 – Communication Services, Health Care, Information Technology and Energy – where consensus foresees YoY growth in excess of 10%. At the other end of the scale, the Materials sector is set to report the most significant YoY earnings decline.

As is typical, banks kick-off reporting season, with JPMorgan (JPM), Wells Fargo (WFC), and Citi (C) set to report before the opening bell on Friday. These will subsequently be followed by Goldman Sachs (GS) on Mon 15th, before Morgan Stanley (MS) and Bank of America (BAC) wrap things up on Tues 16th.

Overall, banks are set to report a YoY earnings decline in the high single-digits, with the general feel of earnings, and guidance, likely to be broadly similar to that seen in the first three months of 2024. Net interest income remains capped by relatively slow loan growth, while net interest margins continue to bottom out, ahead of the first Fed cut, for which my base case remains September. Broader macroeconomic commentary from bank CEOs will also be in focus, as the US remains on course for a ‘soft landing’, despite cracks beginning to emerge in the labour market.

Image

Beyond the banks, and although still some weeks away, it will be earnings from the ‘big tech’ behemoths that market participants also seek to focus on.

The Communication Services sector – including Meta (META) and Alphabet (GOOGL) is set to report the highest YoY earnings growth of any of the 11 sectors in the index, while Information Technology – which comprises stocks such as Nvidia (NVDA) – is set to notch the third highest YoY earnings growth rate. Of course, NVDA’s earnings, albeit not due until towards the end of August, will be one of the most significant releases of earnings season, not least as investors seek to gauge how much juice is still left in the tank, after a stellar 165% YTD advance at the time of writing.

Image

Of course, it is not only earnings season that the equity market must navigate, with a number of other significant risk events looming on the horizon in the short-term.

The most obvious, and significant, of these, is the June CPI report, due tomorrow (Thurs 11thJuly), and seen by many – including your scribe – as a key determinant of whether the aforementioned September FOMC cut remains plausible.

Both policymakers and market participants alike will be looking for further evidence of disinflation, particularly after the April and May CPI prints showed a continued cooling in price pressures. Beyond this, there remains the Q2 GDP (and all-important PCE) release, as well as the usual round of top- and second-tier macro releases, plus the July FOMC meeting at the tail end of the month.

Image

Despite this, and although earnings season naturally presents a key risk for equities more broadly, the medium-term path of least resistance should continue to lead to the upside. Not only is the ‘Fed put’ still in place, in a flexible and forceful form, but both economic and earnings growth should remain resilient, even if the latter fails to meet the relatively high bar that Street analysts have set. Dips, therefore, should remain relatively shallow, and continue to be seen as buying opportunities.

Continue Reading