Diving into 1Q24 Earnings Season
Key Takeaways:
- Still early in 1Q24 earnings season; 14% of S&P 500 companies have reported results.
- Financials see net interest income lower but cite increase in investment banking revenues.
- Electric utilities expected to report the largest earnings growth of all 11 sectors.
- Five “magnificent seven” components to be largest contributors to year-over-year earnings growth.
- A stronger U.S. Dollar may put downward pressure on multinational firms.
S&P 500 earnings for 1Q24 just recently kicked off with reports from the major financial firms. In this weekly, we wanted to provide an overview of what investors could expect over the next few (busy) weeks for earnings. Overall, only 14% of companies in the S&P 500 have reported 1Q24 earnings thus far. According to FactSet, companies are expected to report earnings growth of 0.5% for the quarter, which would mark the third-straight quarter of year-over-year growth. However, FactSet also believes the estimate is too low and S&P 500 earnings will ultimately come in with growth of 7% year-over-year. This is based on historical vs. expected data. The actual earnings growth rate has exceeded the estimated earnings growth rate at the end of reported quarters in 37 of the past 40 quarters.1
- Financials kick off earnings season: Large financial institutions, (e.g., JPMorgan, Wells Fargo, and Citigroup) kicked off 1Q24 earnings season on Friday, April 12th. Banks are reporting lower net interest income (i.e., the difference between the bank’s interest-bearing assets and liabilities), as higher interest rates continue to push customers to higher-yielding products. Investment banking activity increased during the quarter as both Citigroup and Goldman Sachs reported growth of 30%+ during the quarter, driven by higher debt and equity issuance.
- Utilities sector expected to drive growth: The Utilities sector is expected to lead year-over-year earnings growth for the S&P 500. Electric utilities are expected to be the strongest performing. Increased demand from data centers powering generative AI technology is the leading cause of this, with nine of the 10 top companies stating data centers for AI technology were a main source of customer growth.2 If these companies were to be excluded from the Utilities sector, the earnings growth rate would fall to 1.3% YoY (vs. 22% YoY).
- Technology companies still getting AI related boost: The “Magnificent Seven” companies are expected to lead year-over-year earnings growth for the S&P 500 Index. In fact, five of the “magnificent seven” companies (NVIDIA, Amazon, Meta, Alphabet, and Microsoft) are expected to be the top-five contributors to the year-over-year earnings growth for the S&P 500. If these companies were excluded, S&P 500 earnings would report a year-over-year earnings decline of -6.0% (vs. +0.5% estimate).1 Meta, Microsoft, and Alphabet are all scheduled to report 1Q24 earnings results this week.
- Strong U.S. Dollar may affect multinational firms: The U.S. Dollar Index climbed ~2% during the first quarter (compared to 1Q23) which is expected to negatively impact multinational companies’ earnings. A stronger U.S. Dollar not only makes U.S. companies less competitive internationally but is a drag on earnings when converted back into the U.S. Dollars.
The Bottom Line:
Earnings typically come in 3-5% better than the estimate at the start of the reporting season and we expect this to continue. The challenge to S&P 500 returns in this earnings season will be that companies have to produce earnings and outlooks that support the elevated multiples. This may be challenging with a Fed that is unlikely to cut interest rates in the time frame that most had expected, inflation remains stubborn and the economic outlook is highly uncertain.