As of July 29, 42% of S&P 500 companies have reported second-quarter results, and the earnings season is in full swing. The overall earnings per share growth trajectory for the broad market index is accelerating, with a projected year-over-year increase of 10% for the quarter (growth blended), compared to -3.10% a year ago and 6.10% in the previous quarter. This positive performance marks de facto the end of the earnings recession, as EPS has now grown for four consecutive quarters. Around 79% of companies have exceeded EPS expectations, although the magnitude of these surprises is nearly half of what it was last quarter (4% versus 7.70%). While a 4% surprise is below the five-year average of 8.50%, it falls within the pre-pandemic five-year range of 2.10% to 7%.
| Name | % Cos Reported | Growth Blended | Contribution | Surprise | Pos Surprise | Neg Surprise |
| S&P 500 | 42% | 10% | 10% | 4% | 79% | 15% |
| Communication Services | 41% | 21% | 2% | 3% | 78% | 0% |
| Consumer Discretionary | 48% | 7% | 1% | -1% | 60% | 32% |
| Consumer Staples | 34% | 1% | 0% | 3% | 77% | 15% |
| Energy | 27% | -2% | 0% | 6% | 67% | 0% |
| Financials | 72% | 15% | 3% | 6% | 82% | 16% |
| Health Care | 33% | 12% | 1% | 7% | 95% | 5% |
| Industrials | 51% | -2% | 0% | 3% | 78% | 18% |
| Information Technology | 33% | 17% | 3% | 4% | 77% | 18% |
| Materials | 39% | -8% | 0% | 10% | 91% | 9% |
| Real Estate | 29% | 3% | 0% | 2% | 78% | 11% |
| Utilities | 16% | 11% | 0% | 5% | 80% | 0% |
Earnings per share improvements are driven by sustained revenue per share growth and enhanced net profit margins. We anticipate a 5% year-over-year revenue increase for the S&P 500 and a 0.70 percentage point rise in margins, translating to an 11% annual EPS growth, including a 1 percentage point contribution from share buybacks.
Source: FactSet, Freedom Broker calculations
Excluding the volatile materials and energy sectors, earnings per share growth slightly accelerated from 10% to 11% year over year. However, excluding the health care sector, which previously faced a negative earnings trend due to shrinkage of Covid-related revenues, EPS growth slowed from 17% last quarter to 11%, indicating a normalization in the IT and communication sectors.
Source: FactSet, Freedom Broker calculations
Sector analysis: A return to stability
Sector-wise, profit dynamics continue to normalize. While growth rates remain diverse, the disparity is narrowing, with cyclical sector weaknesses diminishing. FactSet's consensus forecast predicts a slightly negative EPS trend for the energy sector through year-end, while the materials sector is expected to resume growth in the third- and fourth-quarter 2024. Major sectors like health care and financials are showing improved profit dynamics, offsetting slower growth in communications and consumer discretionary sectors.
Tempered market sentiment
Investor reactions to quarterly results have been muted compared to the five-year averages and last quarter, influenced by several factors. A significant portion of the second-quarter earnings season coincided with a market correction, and asset rotation away from growth factors has tempered investor sentiment. Despite a weak start to the season, most earnings reports are still forthcoming. Additionally, bearish sentiment is a natural part of any bull market, and given the aggressive price increases of large-cap indices in the first half of 2024, exceptionally optimistic results and forecasts are needed to sustain bullish momentum.
Source: FactSet, Freedom Broker calculations
Key trends:
Consumer under pressure
Consumer sentiment remains under pressure. PepsiCo (PEP, Financial) reports a restrained consumer behavior with beverage and snack sales in North America down by 3% and 4% respectively. McDonald's Corp. (MCD, Financial) saw a 0.70% year-over-year decline in U.S. comparable sales, compared to a 2.50% increase last quarter and a 10.3% rise a year ago. Consumers are seeking better value propositions, as evidenced by Chipotle Mexican Grill (CMG, Financial) reporting an 11% year-over-year increase in comparable sales for the second quarter, up from 7% last quarter. Visa Inc. (V, Financial) also reported a slowdown in payment volume growth to 5%, down from 7% last quarter.
Overall, demand for services remains high but is decelerating. Las Vegas Sands Corp. (LVS, Financial) saw sales growth of 9%, down from 40% last quarter, indicating trend normalization. The cruise leisure segment is also seeing a normalization, with Royal Caribbean Group (RCL, Financial) sales growth slowing to 17%, down from 30% last quarter, yet still significantly above pre-pandemic levels. Airline revenues continue to slow due to pattern normalization and fleet size limitations, with Southwest Airlines (LUV, Financial), United Airlines Holdings (UAL, Financial), Delta Air Lines (DAL, Financial) and American Airlines Group (AAL, Financial) reporting revenue growth of 5%, 6%, 5% and 2%, respectively, down from 11%, 10%, 6%,and 3% last quarter.
Notably, despite ongoing challenges in the transportation segment, the bottom may be near or reached: FedEx Corp. (FDX, Financial) posted its first positive revenue growth (0.90%) in seven quarters, despite a weak negative trend in average daily shipments; UPS (UPS, Financial) also reported an increase in shipment volumes for the first time in nine quarters. The luxury goods segment remains under pressure, with LVMH Moet Hennessy Louis Vuitton SE (XPAR:MC) reporting a 2% year-over-year sales growth in the U.S., compared to 4% in Europe.
Corporate spending remains relatively stable. Corporate spending remains resilient, with Alphabet (GOOGL, Financial) reporting an 11% increase in ad revenue and a 29% rise in cloud infrastructure solutions. IT consulting demand is still under pressure; Accenture (ACN, Financial) saw a 1% revenue growth in North America, while IBM's (IBM, Financial) consulting revenues grew 2%. However, Accenture noted a 50% quarter-over-quarter order increase, and IBM expects consulting demand to improve in the second half of 2024. Early software sector reports indicate sustained demand, with ServiceNow (NOW, Financial), Adobe (ADBE, Financial) and IBM's software revenues growing 22%, 10% and 8.40% year-over-year, respectively.
In the durable goods segment, the defense and aerospace component sectors show strong growth, while machinery, equipment and industrial/automotive chips continue to decline. FactSet predicts a 15% year-over-year increase in S&P 500 capital expenditures, up from 10% last quarter. Industrial conglomerates also accelerated revenue growth, with Honeywell (HON, Financial) and 3M (MMM, Financial) reporting 5% and 5.70% year-over-year growth.
Big tech results
As of July 29, a few Big Tech companies have reported their second-quarter 2024 results, including Alphabet (GOOGL, Financial), Netflix (NFLX), Tesla (TSLA), TSMC (TSM) and ASML (ASML):
| Ticker | Name | Report date | Sales Surprise | EPS Surprise | Pre-market price change | Day-end price change |
| TSLA | Tesla, Inc. | 07/23/2024 | 3,9% | -15,3% | 0,7% | -12,3% |
| GOOGL | Alphabet Inc. Class A | 07/23/2024 | 0,6% | 2,3% | 0,2% | -5,0% |
| TSM | Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR | 07/18/2024 | 1,6% | 4,0% | 2,8% | -3,5% |
| ASML | ASML Holding NV ADR | 07/17/2024 | 4,5% | 8,8% | -8,3% | -12,7% |
| NFLX | Netflix, Inc. | 07/18/2024 | 0,3% | 2,9% | 1,4% | -1,5% |
FactSet
As shown in the table above, all reporting companies delivered positive revenue surprises and all, except Tesla (TSLA), posted positive EPS surprises. Overall, excluding Tesla, the results can be considered strong. However, amid significant stock price increases since the beginning of the year, investors focused on risks.
For instance, Alphabet (GOOGL, Financial) shareholders were disappointed by planned increases in capital expenditures, fearing margin pressure. Investors in Taiwan Semiconductor Manufacturing Co. (TSM) and ASML Holding NV (ASML) took profits despite improved EPS forecasts for 2024 due to concerns over tighter export controls on chip shipments to China. Netflix Inc. (NFLX) faced less negativity but was also impacted by the rotation out of growth factor companies, affecting the streaming giant.
Conclusion
Interim second-quarter results highlight strong, healthy EPS dynamics for the S&P 500, with growth dispersion narrowing and cyclical sector weaknesses fading. The weak response to quarterly results is attributed to market corrections, asset rotation and base effects. EPS growth estimates for 2024-25 remain stable—according to the FactSet consensus forecast, earnings could grow 11.20% and 14.60%, respectively. We maintain our 11% EPS growth forecast for 2024 and 11.50% for 2025, with S&P 500 targets of 5,640 by year-end 2024 and 5,840 by mid-2025.
