Navigating Q2 Earnings: Tech Wins, Consumer Struggles, and What’s Next
Takeaways
Mixed but Strong Q2 2024 Results: 78% of S&P 500 companies reported positive earnings surprises, exceeding the 10-year average. However, the magnitude of these surprises is below the average, with only a 3.5% surprise rate compared to the usual 6.8%. The Magnificent 7 has significantly contributed to the S&P 500's 10.8% earnings growth.
Sector-Specific Trends: Consumer discretionary and staples sectors are underperforming, with many companies missing earnings estimates due to shifts in consumer behavior and macroeconomic headwinds. Large technology companies continue to show strong earnings, though the growth rate is less impressive than in previous quarters.
Cautious Forward Guidance: While 54% of companies issued positive guidance for fiscal year 2024, guidance for Q3 2024 is more cautious, with 55% issuing negative guidance. Small capitalization stocks briefly rallied but then sputtered as new concerns about economic growth emerged.The eyes of the world are on France as the 2024 Summer Olympics “kicked” off with men’s soccer last week. The stakes are high, not only for the thousands of athletes hoping to take home the gold, but for the capital city and country as well. In this week’s Markets In a Minute, we evaluate the Olympics’ checkered economic past and ask, “Is the economic juice worth the expensive squeeze?”
With second quarter earnings season almost complete, companies have provided an important window into economic trends. As of August 12, 91% of S&P 500 companies have reported their Q2 2024 earnings. While the results have been mixed compared to expectations, earnings growth remains strong despite some softer economic data. At the sector level, some macroeconomic trends are becoming clearer, particularly in the consumer discretionary sector. Nearly 75% of consumers have said they have traded down to lower-priced products, often by buying less or delaying purchases. High-flying tech names are still delivering earnings beats, but the margin of outperformance has narrowed compared to the last six quarters. Notably, the “Magnificent 7” have been responsible for nearly 30% of the S&P 500’s earnings growth, which currently stands at 10.8%. If this growth holds, it will be the highest since Q4 2021.
S&P 500 Earnings Growth (Year Over Year): Q2 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. Data as of August 9, 2024.
Earnings Surprises
While earnings have broadly been robust, this season has provided hints of change in the broad economy. 78% of S&P 500 companies are reporting positive earnings surprises, which is better than the 10-year average of 74%. However, the size of these surprises is smaller, averaging 3.5% compared to the 10-year average of 6.8%.
Nine out of the 11 sectors are reporting year-over-year earnings growth, with utilities, tech, financials, health care, and consumer discretionary seeing double-digit growth. Health care and real estate lead with 84% of companies in those two sectors beating earnings estimates, while consumer discretionary and consumer staples are lagging behind with the lowest percentages of companies exceeding expectations.
Despite strong earnings performance overall, the market's reaction to earnings surprises has been more subdued this quarter, rewarding positive earnings surprises by less than usual and penalizing negative surprises by more than usual. On average, a negative surprise has led to a 3.8% drop in share price, vs the 5-year average decline of 2.3%.
Sector Trends
Companies in the consumer discretionary and consumer staples sectors have been struggling, with many missing earnings estimates. This reflects a broader trend of a softening consumer, as indicated by macroeconomic data. Key themes from earnings calls include:
Shifts in consumer spending due to the macroeconomic environment, with consumers trading down to lower priced products. Managements expect these shifts to persist
Many large restaurant and retail chains giving cautious to negative forward-looking guidance
Earnings and revenue misses and the lowest percentage of earnings beats
Amazon has been a major contributor to the sector’s earnings growth; without Amazon, the year-over-year earnings growth rate for the consumer discretionary sector falls from +11.9% to -3.5%
While the technology sector continues to be the bright spot in earnings, growth is not quite as impressive as prior quarters. Most big tech firms continue to beat revenue and/or earnings per share estimates, albeit by a smaller magnitude than before. The sector continues to be the dominant contributor to the S&P 500 earnings growth rate. Noteworthy trends include:
Soft revenue and earnings beats among the largest companies
Margin expansion among the largest companies
Increased forward-looking estimates for capital spending, which could hurt margins
Little cautionary language with respect to the macroeconomic environment
The technology sector, and the market as a whole, remains heavily dependent on the earnings power of a handful of names, including Nvidia, which is yet to report. The semiconductor company is expected to be the largest contributor to year-over-year earnings growth for the sector; without Nvidia, the earnings growth rate for the sector would fall from +18.7% to +9.3%.
S&P 500 Sector Earnings Growth Rate Contributors / Detractors (Year-Over-Year): Q2 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. Data as of August 9, 2024.
Looking Ahead
Guidance for the remainder of the year remains optimistic, while companies approach the upcoming quarter with a more conservative outlook. 272 companies have issued guidance for the current fiscal year, with 54% issuing positive guidance while the remaining 46% have issued negative guidance. The sample size of companies issuing guidance for Q3 is smaller at just 86 companies. Third quarter guidance is more cautious, with 45% issuing positive guidance for Q3 and the remaining 55% issuing negative guidance. The S&P 500 is expected to see a 10% earnings growth rate for 2024, slightly down from the 11% going into the quarter.
Small caps experienced a brief rally due to softer-than expected macroeconomic data, which hinted at a Fed rate cut in September. However, the rally faded in the following weeks as hotter-than-expected unemployment data raised fears of a recession. As we move into 2025, earnings growth is expected to broaden out, with small- and mid-cap companies potentially leading the way over large caps.
Actual vs Expected Earnings Per Share
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. Data as of August 9, 2024.
Between a seasonally volatile period for markets, an upcoming presidential election season with newly introduced uncertainty, and softer guidance for the upcoming quarter, we expect market performance to be choppy compared to what we saw in the first half of the year. However, economic growth for the year is still expected to be a healthy 2.9% and guidance for the remainder of the year is still positive. This earnings season is particularly important as it will set the tone for market expectations moving forward, especially in light of potential economic headwinds. We will continue to monitor these developments and provide updates in due course.
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.
