Within the S&P 500, 42 companies reported earnings last week. 79% of S&P 500 firms have reported better-than-expected earnings for the quarter. The third-quarter earnings season enters its second busiest reporting week, with 112 S&P 500 companies scheduled to report. Among the companies scheduled include Coca-Cola (KO), Tesla (TSLA), Union Pacific (UNP), 3M (MMM), and Honeywell (HON). A more detailed preview of the earnings season is available here.
The S&P 500 rose by 0.9% for the week. The Magnificent 7, consisting of Microsoft (MSFT), Meta Platforms (META), Amazon.com (AMZN), Apple (AAPL), NVIDIA
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(NVDA), Alphabet (GOOGL), and Tesla (TSLA), had a gain of 0.7%. Interestingly, despite the S&P 500 setting a new all-time closing high on Friday, the Magnificent 7 remains about 5% below its July high. However, the Magnificent 7 still dominates the year-to-date performance.
The more economically sensitive cyclical outperformed, the less economically exposed defensive stocks. The spike in cyclical outperformance followed the much better-than-expected monthly jobs report, which removed the short-term fear of recession. The outperformance of smaller-capitalization stocks is another sign that markets are becoming less concerned about the risk of recession.
The financials sector was the most significant contributor to earnings growth, led by JPMorgan Chase (JPM), Progressive (PGR), Wells Fargo (WFC), and Morgan Stanley (MS), according to FactSet.
Conversely, the energy, healthcare, and industrials sectors have been the most significant detractors of S&P 500 earnings growth. Earnings estimates for energy companies, including Chevron (CVX) and Exxon Mobil (XOM), were cut, sending the energy sector estimates to -26.0% year-over-year after expecting a -19.1% at the start of the earnings season.
Boeing (BA) announced much worse than expected preliminary results last week, which caused analysts to slash earnings estimates, sending the industrials sector estimates to -8.4% year-over-year versus 1.3% growth at the start of the earnings season. Boeing is scheduled to make its official earnings report on Wednesday.
Healthcare sector earnings, expected to be a bright spot this quarter, have fallen to an expected 5.7% growth rate compared to 11.2% year-over-year at the end of the quarter. The primary culprit was Eli Lilly (LLY), which saw earnings estimates revised lower after an announcement that acquisition-related charges for in-process research and development (IPR&D) would lower profits by approximately $2.83 billion or $3.08 per share.
Sales growth is closely tied to nominal GDP growth, combining after-inflation economic growth (real GDP) with inflation. With nominal GDP growth likely solid year-over-year for the first quarter, topline revenue growth for companies should have a tailwind. At this point in the earnings season, sales growth has matched expectations.
So far, the blended earnings performance has underperformed expectations at the end of the quarter. Combining actual results with consensus estimates for companies yet to report, the blended earnings growth rate for the quarter is at +3.4% year-over-year, below the expectation of +4.4% at the end of the quarter.
Based on the better-than-expected consumer spending data last week, the Atlanta Fed estimates 3.4% 3Q GDP growth. The hurricanes and the threatened dock worker strike complicate the analysis of economic data since the more robust retail sales could have been driven by pulling forward demand, which will then be a headwind for upcoming consumer spending data. In any case, the economy remains resilient; it is just a matter of how strong the normalized growth is.
The additional rate cuts expected in 2024 are two successive 25 basis point (0.25%) cuts in November and December. While the probability, based on the pricing of Fed Fund futures, remains high, they have fallen from even higher conviction levels as recent economic data has been robust.
The heart of earnings season kicks off this week with the laggard of the Magnificent 7, Tesla (TSLA), reporting earnings. Even though the current estimated third-quarter earnings growth doesn’t reflect it yet, almost eighty percent of companies have outperformed earnings forecasts. Forward guidance remains critical, with less fear of an economic downturn and consensus estimates calling for double-digit earnings growth in the fourth quarter and 2025.
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