The Weekend Edition # 140 - US Q2, 2024 Earnings Season Preview

Welcome to another issue of the Weekend Edition!

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Here's what we cover

• Market Recap - Breadth Weak

• US Q2, 2024 Earnings Preview

• Articles this Week - Our Q3, 2024 Outlook

• Closing Thoughts - Bumpy Landing

• Calendars

Market Recap - Breadth Weak

July 01 - July 05, 2024

US Equity Markets had been chopping in a range until Wednesday when Chair Powell came out and discussed the positive progress made on inflation. We saw the market successfully break out of the range and Friday brought us the Jobs Report, which added to that.

The stock highlight of the week, however, was Tesla, which broke out in a meaningful way on a less-than-bad delivery report. And then Friday belonged to Meta. We keep seeing this rotation among the Mag 7, almost as if they’re playing an odd game of roulette.

However, we’re still not seeing the market broaden out as much as we would like. Here’s the S&P 500 vs. S&P 500 Equal-Weight - the latter is clearly lagging.

For the S&P 500 Cap-Weighted Index (SPX), we see only 45% of the stocks above their 50-day moving average.

For the Nasdaq, we see New Lows dominate over New Highs. We’re not at an extreme as yet but, as you can see from the bottom half of the chart below, a lower value corresponds with market drawdowns.

US Q2, 2024 Earnings Preview

Next week brings us the most exciting part of the quarter - the start of earnings season. As usual, we have a few earnings during the week but the season starts with the banks on Friday.

We’ve been talking about being out of an earnings recession and this quarter is expected to bring an earnings boom!.

In 2023 earnings growth was 1%. 2024 and 2025 earnings growth is expected at double digits with 11.3% in 2024 and 14.4% in 2025

For Q2, 2024, earnings are expected to see a boost with EPS YoY growth estimated at 8.8%, with the SPX ex-Mag 6 at 5% (first positive growth).

The bar is set relatively high this time when estimates had been low single digits for the last 3 quarters. EPS beats is what drove a lot of the price action over the last few quarters, and misses were punished hard at an average of -3%. We may see a more balanced price reaction this time.

Estimate Revisions have been negligible 

What’s unusual is that there has been little change to EPS estimates this time – on Mar 31 the estimate was 9.1% (the usual decline after Q1 results is about 3%).

The same is true when we look at Revenue estimates. There’s hardly been a change.

So basically, the market is quite “bullish” on earnings and confident that companies are set to improve.

No surprise the leaders are still info tech and comm services, while laggards are materials, industrials, and staples.

While the overall Net Profit margin for the S&P 500 is expected to remain the same as a year ago, significant positive changes are expected in Info Tech, Utilities, and Communication Services. Meanwhile, negative changes are expected in Energy, Materials, and Health Care.

Handoff

We’re seeing a bit of the handoff as well. Even though EPS from the Mag 6 (ex Tesla) is expected at 30% YoY and Revenue growth is expected to slow.

We’re also expected to see the handoff between the Mag 6 and the rest of Tech.

And finally, here’s the calendar… with the third week the busiest week of earnings season.

Bottom Line:

• If the 8.8% EPS YoY Growth is achieved, that could definitely keep this market rally going. Seeing as how tech is leading the EPS estimate basket, the tech leadership could also continue.

• The 5% EPS YoY Growth in the rest of the SPX also means that we could see the market broaden out.

Articles this Week - Our Q3, 2024 Outlook

Here’s a link to the YouTube Video:

Here’s the Chart Deck that you can download directly ⤵️ and please feel free to share it with anyone who may find it interesting.

Closing Thoughts - Bumpy Landing

The US Unemployment Rate is now 4.1% and while there were 206k jobs added in June according to the Nonfarm Payroll report, prior months were revised lower. Average Hourly Earnings came out in line, which was against lower estimates. In conclusion: The jobs market is certainly cooling, probably a tad more than expected.

While the market’s initial reaction was muted, the headlines read: “sooner Fed cuts expected”. So there you have it, bad news is, once again, good news.

Then again, here’s something to think about. With unemployment increasing, there may be a point where the Fed will have to cut in September, and that may not be the best situation given the way inflation has been remaining sticky.

On the other hand, if the Fed decides to hold off on cuts, unemployment may increase drastically, and US growth may slow down enough to push the economy to the brink of a recession. Whether it topples over into a recession remains to be seen. But one thing’s for sure, it’s not going to be as smooth a landing as everyone thought.

Have a great week ahead!

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

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Calendars

US Earnings Calendar

US Economic Calendar in Eastern Time (Source: Trading Economics)

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.