First-quarter earnings season has become one of the important market supporting factors during second-quarter 2024. First-quarter results were not stellar, but upbeat: S&P 500 earnings per share increased by 6% (according to FactSet), EPS surprise was at the level of 79.50% (which is above the five-year average of 77% and above the 10-year average of 74%, according to FactSet).
Looking at the market reaction to the quarterly results, it can be concluded the earnings perception was weaker compared to the average numbers. At the same time, taking into account the fact a significant part of the earnings season fell on the April market sell-off, we believe that quotes reaction was not bad.
First-quarter earnings season core conclusions:
Demand for artificial intelligence. The demand for AI solutions remains robust. Leading cloud providers reporting accelerated revenue growth in their infrastructure cloud services. Microsoft's CEO noted that 7 percentage points of the growth in their IaaS services were directly attributable to AI. Major hyperscalers like Microsoft (MSFT, Financial), Amazon (AMZN, Financial) and Google (GOOGL) are also experiencing increased capital expenditures. Meanwhile, the surge in demand for Nvidia's (NVDA) server GPU chips remains exceptionally strong.
Source: FactSet.
Corporate demand overview. Overall corporate demand signals sustained momentum heading into the current quarter. Advertising giants Meta Platforms (META, Financial) and Alphabet Inc. (GOOG, Financial) reported combined revenue growth of 19% year over year (full-year growth forecast remains at 14%), professional services spending rose 5% year over year (previously 6%), IT services spending increased 1% (but expected to accelerate to 3% for the full year), and software spending surged 14% year over year (previous quarter growth was 15% year over year). Fueled by resurgent demand for PCs, smartphones, electronics and a surge in AI spending, the chip industry collectively gained 28% (vs. 20% year over year in the prior quarter).
The durable goods demand landscape is more nuanced, with medical equipment sales growing 8% year over year (previous quarter growth was 10%), electronics spending also rising 8% year over year (versus 11% in the prior quarter), while machinery industry sales contracted 1% year over year (vs. 3% growth in the prior quarter), weighed down by a very high prior-period base. Similarly, base effects and a locally softer market cycle impacted semiconductor equipment sales, which declined 9% year over year (versus a 5% decline in the prior quarter). Inventory destocking in the communications equipment segment led to a 6% drop in sales for companies in that industry, compared to 1% growth in the previous quarter.
Consumer activity. As evidenced by disaggregated GDP data, consumer spending on goods categories remains lackluster compared to the strength of services demand. Within goods categories, consumers continue to prioritize essential items over discretionary purchases. The chart below illustrates these trends using select companies as proxies (Walmart (WMT, Financial) and Procter & Gamble (PG, Financial) are considered proxies for demand for essential goods, while the remaining companies are proxies for demand for cyclical goods).
Services demand remains strong, as evidenced by its positive contribution to first-quarter GDP growth. Revenue growth for several leading companies in the out-of-home leisure and tourism segment remained robust in the first quarter, with expectations for Q2-Q4 2024 indicating a gradual moderation in demand (which we interpret as a normalization of patterns). However, a deterioration in comparable sales growth at major chains such as Starbucks (SBUX, Financial), Yum! (YUM, Financial), and McDonald's Corporation (MCD, Financial) compared to previous periods suggests weakness among certain consumer groups (due to uneven inflationary effects). Rising of non-discretionary service spending, including insurance, is another factor putting pressure on consumers.
Source: FactSet
EPS growth expectations
While first-quarter 2024 earnings results were generally positive, the market's focus is primarily on expectations for future quarters. According to FactSet data, earnings per share growth expectations for Q2-Q4 2024 remain relatively stable, with some indication of a potential acceleration in growth toward the end of the year.
Source: FactSet
According to FactSet data, sell-side analysts maintain a positive outlook for EPS growth, with the consensus forecast implying an 11% year-over-year increase in 2024. Steady, upbeat market expectations support the scenario of robust earnings performance for the current calendar year.
Source: FactSet
FactSet's consensus earnings forecast for the S&P 500 index has experienced a slight downward revision since December 2023, primarily driven by weaker expectations for cyclical sectors such as materials, energy, industrials and health care. At the same time, weaker expectations for the noted sectors are primarily driven by the negative contributions from individual companies, including the following: Gilead Sciences, Inc. (GILD, Financial) and Bristol-Myers Squibb Company (BMY, Financial) (both companies faced with asset write-downs and additional expenses related to recent acquisitions), Boeing (BA, Financial) (supply chain, production, and quality control challenges), Albemarle Corporation (ALB, Financial) (lithium prices decline).
It is also important to note analyst sentiment (according to FactSet consensus forecast dynamics) for earnings per share growth in 2024 and 2025 remains strong, increasing the likelihood of favorable EPS growth scenarios for these periods.
Source: FactSet, calculations by Freedom Broker
*The graph depicts the dynamics of the proportion of improved EPS forecasts for the current year since December of last year (according to the FactSet consensus forecast). For example, for 2024, (based on the composition of the S&P 500 index as of December 2023), the proportion of companies for which the EPS forecast for 2024 improves is calculated. Similar calculations have been made for the index since 2012. The year 2018 is excluded from the calculation because corporate tax cuts took effect in 2018.
Source: FactSet, calculations by Freedom Broker
*The graph is similar to the previous one, with the difference being that the current graph presents expectations for the next year, i.e., for 2025. Similarly, the average is calculated as the change in expectations for the year following the current unclosed year (i.e., at the beginning of 2018, expectations for 2020 are evaluated).
Conclusions
Based on the strong actual financial results for first-quarter 2024, as well as the robust macroeconomic backdrop and market expectations for EPS dynamics in 2024-25, we conclude the probability of significant EPS growth in the current year has increased. We maintain our forecast for the current year at 11%, while slightly raising the growth forecast for 2025 to 11.50%. Additionally, we adjust the forecast within an aggressive scenario ("Proactive Fed"). As a result, we raise the target level for the S&P 500 index to 5,570 points by the end of the current year and to 5,750 points for the next 12 months.
