Mitch on the Markets

May 13th, 2024

Q1 Earnings Season Came In Strong. Why Is No One Talking About It?

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The Strong Q1 Earnings Season That No One is Talking About

As I write, over 80% of S&P 500 companies have reported Q1 2024 earnings, and the results have been not only positive, but also largely better-than-expected. The percentage of S&P 500 companies reporting positive earnings surprises in Q1 (and the average size of their earnings beats) have both been running above 10-year averages. All told, S&P 500 companies are reporting their highest year-over-year earnings growth rate since Q2 2022.

But no one is talking about it.

This is actually a pattern. Over my long tenure covering markets and earnings seasons, I’ve noted that the financial media tends to focus on quarterly results from buzzy companies (think Apple, Tesla and Disney), while largely eschewing commentary on aggregate results or sector trends. This may make sense from a media perspective, but if you’re an equity market investor managing a diversified portfolio, a much broader look at earnings data every quarter is essential.1

As I write, 400 of the 500 S&P 500 companies have reported earnings, and so far, we’ve seen total earnings up +4.4% year-over-year on +4.2% higher revenues. A solid 78.3% of companies have exceeded earnings expectations, with 61% beating on revenues. As seen on the chart below, the earnings rebound that started late last year looks like it is continuing apace.

Zack Investment Research2

Making the Most of Today’s Market

Americans are largely negative on the economy. According to a recent poll, 56% of respondents said the U.S. economy got worse over the past two years. But we know from hard data that the exact opposite occurred.

This disconnect between negative sentiment and positive fundamentals might be creating a unique opportunity for investors.

To learn more about this opportunity and why Americans are sour on a strong economy, I recommend downloading our May 2024 Market Strategy Report. It covers topics, such as:

• Americans Think the Economy is Lousy. Is It?
• Update on Inflation & the Fed
• The Market’s Fed Exuberance
• Bottom Line for Investors

If you have $500,000 or more to invest, click on the link below to get our free report today!

Download our May 2024 Market Strategy Report3

The big headline in the first quarter was that inflation data came in stickier-than-expected, with GDP decelerating from the growth posted in the second half of last year. In my column last week, I noted that the combined forces of stubborn inflation and slowing economic growth had even resulted in some “stagflation” chatter.

A cautious or even outright bearish outlook on the economy might have been confirmed if companies and analysts were seen lowering earnings-per-share (EPS) estimates for the second quarter. But the opposite happened. Bottom-up EPS estimates for Q2 rose by 0.7% during the month of April, which is not what we expect to see in the first month of the new quarter. In fact, over the past 20 years (40 quarters), bottom-up EPS estimates have fallen an average of -1.8% in the first month of a new quarter. Instead of hedging, analysts grew more bullish.

A fair assessment of Q1 2024 earnings, however, would take into account the impact made by the Technology sector and specifically by the ‘Magnificent 7’ stocks. These companies currently account for nearly 30% of the S&P 500’s market cap and just over 20% of the index’s total earnings. And they continue to be a strong force pushing overall earnings results higher. The Technology sector is expected to generate +28.2% year-over-year earnings growth on +8.9% higher revenues.

Zacks Investment Research notes that without the Technology sector, aggregate S&P 500 earnings would be down -2.2% year-over-year, which may give the impression that Technology is the only sector performing well. But that’s not the case—eight of eleven sectors reported earnings growth in Q1 2024, and it’s been Energy once again that is serving as an anchor to the overall earnings picture. When excluding the impact of Energy, S&P 500 earnings would be up a stout +8.3% year-over-year.

Bottom Line for Investors

When framing an investment outlook based on the earnings picture, my overall view remains positive following this Q1 earnings season. Looking ahead to when all 500 companies have reported, we expect earnings to be up +5.3% year-over-year on +4.3% higher revenues, which would follow the +6.8% earnings growth on +3.9% revenue gains in the preceding period. For 2024 as a whole, the total S&P 500 earnings are expected to be up +8.9% on +1.7% revenue growth.

Stock prices reflect forward expectations of earnings and free cash flow, as well as expectations about economic growth, inflation, and interest rates. But I would argue that earnings matter above all else. The fact that aggregate earnings do not get much media coverage is, in my view, a reminder to investors that you have to seek that data out on your own.

To stay on top of all the latest trends taking place in the equity markets, I’m offering our free May 2024 Market Strategy Report4, which this month covers the following topics:

• Americans Think the Economy is Lousy. Is It?
• Update on Inflation & the Fed
• The Market’s Fed Exuberance
• Bottom Line for Investors

If you have $500,000 or more to invest, click on the link below to get our free guide today!

Disclosure

1 Zacks.com. May 3, 2024. https://www.zacks.com/commentary/2268292/mag-7-leadership-reflects-earnings-power

2 Zacks.com. May 3, 2024. https://www.zacks.com/commentary/2268292/mag-7-leadership-reflects-earnings-power

3 Zacks Investment Management reserves the right to amend the terms or rescind the free Market Strategy Report offer at any time and for any reason at its discretion.

4 Zacks Investment Management reserves the right to amend the terms or rescind the free Market Strategy Report offer at any time and for any reason at its discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index is a modified market capitalization weighted index composed of preferred stock and securities that are functionally equivalent to preferred stock including, but not limited to, depositary preferred securities, perpetual subordinated debt and certain securities issued by banks and other financial institutions that are eligible for capital treatment with respect to such instruments akin to that received for issuance of straight preferred stock. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The MSCI ACWI ex U.S. Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. The index covers approximately 85% of the global equity opportunity set outside the U.S. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Russell 2000 Index is a well-known, unmanaged index of the prices of 2000 small-cap company common stocks, selected by Russell. The Russell 2000 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The S&P Mid Cap 400 provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

The S&P 500 Pure Value index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics by using a style-attractiveness-weighting scheme. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
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