As of today, roughly 90% of companies in the S&P 500 index have reported earnings for Q1. As we wrote a few weeks ago, a weak start to the season initially caused the aggregate earnings-per-share (EPS) estimate to drop to just below $54, which would have implied roughly 0% year-over-year growth. Since then, however, the balance of the reports has come in above expectations, with companies in the Communication Services (see GOOGL, NFLX, META) and Consumer Discretionary (see AMZN) sectors being the largest contributors. This has caused the aggregate estimate for the quarter to reserve course and rise to almost $56, which would imply a much more robust 5.1% year-over-year growth rate. This pattern, often referred to as “earnings smile”, is one we have seen recurring quite frequently in the past, as companies tend to lower expectations right before earnings season so that they can then more easily beat them.
To be fair, investors have a lot to smile about when looking at earnings estimates for the rest of the year and beyond. From 5.1% in Q1, earnings growth is expected to accelerate to 9.8% in Q2, 8.9% in Q3, and 14.2% in Q4. This would amount to an overall growth rate of 10.1% for 2024, which is then expected to accelerate to 13.9% in 2025 and 11.8% in 2026. These expectations are largely predicated on the economy staying resilient, as well as on an anticipated recovery in profit margins following the squeeze caused by the high inflation of the last couple of years.
If these expectations end up coming to fruition, they will provide tremendous support for stocks and breathe new life into the bull market that began in the Fall of 2022. At the same time, such rosy expectations come with the risk of being disappointed. The guidance offered by companies during the current reporting season has done little to dent analysts’ optimism. However, should the economy unexpectedly slow down going forward, such estimates could come into question, likely resulting in some market turbulence. This is not our base case at the moment, but we will be watching the incoming economic data very closely to make sure it remains aligned with the sanguine outlook for corporate profits.
Q1 EPS Exhibiting the Typical Earnings Smile Around Reporting Season
Source: LSEG Datastream, Yardeni Research, as of 5/2/2024
Rosy Estimates for 2024 and Beyond
Source: LSEG Datastream, Yardeni Research, as of 5/2/2024
Sauro Locatelli CFA, FRM™, SCR™
Director of Quantitative Research
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