Busy Week Ahead: What to Watch in Markets and Earnings

Takeaways

• Slowing Growth for the Magnificent Seven: Although the "Magnificent Seven" tech giants—Google, Microsoft, Meta, Amazon, and Apple—are driving strong earnings within the S&P 500, their growth is beginning to decelerate. This trend may continue into 2025 as other sectors are expected to gain momentum.

• AI and Consumer Spending Trends: Investments in AI, especially from major tech players, continue to shape the market, particularly within customer service and software engineering. Additionally, while high-income consumers maintain spending, lower-income consumers are struggling, though overall consumer resilience remains a supportive factor for corporate earnings.

• Small-Cap Performance Upswing: Small-cap companies are gaining favor, with optimistic outlooks from management teams and notable stock gains for those beating expectations. These companies are benefiting from the market’s more forgiving stance, even when they miss performance targets.

Buckle up because this week is one of the busiest of the year between key economic data releases that could sway the Federal Reserve to cut or not cut interest rates, countdown to the election with razor-thin margins up and down the ballot, and earnings reports from some of the largest companies in the country. 

Among those reporting are five of the “Magnificent Seven”—Google, Microsoft, Meta, Amazon, and Apple—which together make up 25% of the S&P 500’s market capitalization. With so much riding on these earnings, let’s take a closer look at what we’ve seen so far and what we expect to learn.

The Magnificent Seven Hand-Off?

Thirty seven percent of companies in the S&P 500 have already shared their earnings results for the third quarter, and this week alone another 34% of companies (representing nearly half of the S&P 500's market value) are set to report.
Of those companies that have reported, about 75% have released better-than-expected earnings per share (EPS). This proportion is slightly below the five-year average but aligns with the 10-year trend. Technology and communication services companies, particularly those in the “Magnificent Seven,” have posted some of the market’s strongest year-over-year earnings growth. Looking forward, however, their growth pace has slowed and is expected to continue to slow in 2025, even as other sectors in the S&P 500 pick up speed.

Slower Earnings Growth for Magnificent 7

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. Note: views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. Source: Kestra Investment Management with data from Bloomberg. Index proxies: S&P 500, TSLA, GOOGL, META, NVDA, MSFT, AMZN, AAPL. Index data from March 2022 through September 30, 2024. Pattern fill represents estimates. Forward-looking estimates may not come to pass.

Emerging Themes: AI Investment and Consumer Resilience

Two themes are shaping up to be key:

1. AI Investments: Many companies are focusing on AI, especially in customer service and software engineering. The bulk of the spending in AI continues to be from the hyperscalers such as Amazon, Microsoft, and other familiar tech giants.

2.Consumer Resilience: Companies are noting that higher-income consumers continue to spend, while low-income consumers face more challenges. With employment remaining strong, consumer spending is likely to stay a solid support for corporate earnings.

S&P 500 Earnings Above, In-Line, Below Estimates: Q3 2024

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. Note: views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. Source: Kestra Investment Management with data from FactSet. Index proxies: S&P 500 and S&P 500 sector data. Data as of October 25, 2024.

Small Cap Winners

While large-cap companies, particularly in Technology, continue to report extraordinarily strong earnings growth, the market has been favoring smaller companies, at least in some ways. Management teams of small-cap companies sound more optimistic about the economic environment than their large-cap peers. In addition, small-cap companies that beat expectations are seeing their stocks rise more than usual and more than large-cap companies. Similarly, small companies that miss expectations are being penalized less. 

Revenue vs. Profit Margins: The Real Story

Interestingly, while 75% of companies are beating EPS estimates, only 59% are beating revenue estimates. This indicates that much of the earnings growth has come from cost-cutting or margin expansion rather than an increase in sales. For Q3 2024, the blended net profit margin for the S&P 500 stands at 12%, slightly below last year’s level but above the five-year average of 11.5%.

What’s Next?

Analysts expect the S&P 500’s year-over-year earnings growth rate for Q3 to be around 3.6%. If met, this will mark the fifth straight quarter of earnings growth, though it would be the slowest growth rate since Q2 2023. The Magnificent Seven’s five members reporting this week alone are projected to grow earnings by 19% year-over-year

 
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, and Bluespring Wealth Partners, LLC. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by any entity for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, and Bluespring Wealth Partners, LLC. Does not offer tax or legal advice.