As always, the upcoming 4th quarter results of companies will be crucial for market trends. What we want to know today is what the “real economy” thinks of the economists’ concerns, be they economic, monetary, political or geopolitical. In short, is there cause for worry about the current situation and the near future?
The facts
The trend in US corporate profits in Q4 2024 may be more significant than in previous quarters, for several reasons. Firstly, because the main US stock market indices rose very little in the last quarter, which could indicate that the upward momentum is slowing. Secondly, it’s easy to imagine that the expected growth of artificial intelligence related businesses will (at some point) slow down.
It is also conceivable that the recent rise in inflation could have a (negative) impact on the margins of many companies.
Finally, it’s hard not to mention Trump’s return to power. Although he is not yet in the White House, he is already causing quite a stir, particularly in terms of tariff expectations.
Forecasts revised downwards
Ahead of the start of the earnings season, analysts and companies cut their profit forecasts for the fourth quarter, leading to lower estimates for the S&P 500 than at the start of the quarter. Despite this decline, the year-on-year earnings growth rate for Q4 2024 is estimated at 11.9%, which would represent the strongest growth in three years and mark a sixth consecutive quarter of increases.
Analysts’ revisions to earnings estimates were lower than the five-year average, with a fall of 2.7%, compared with an average of -3.4%. However, a high number of S&P 500 companies (71 out of 106) have issued negative earnings guidance, above both the five- and ten-year averages. Seven of the
eleven sectors are expected to post year-on-year earnings growth, with information technology, financial services and communication services posting the strongest gains, while energy is the only sector forecasting a double-digit decline.
On the revenue side, growth is forecast at 4.6%, down on initial expectations of 5.2%, but still marking the 17th consecutive quarter of growth. Information technology is expected to lead this growth, while energy is expected to record the biggest drop in revenues among the three declining sectors.
Profits at their highest level since 2021!
Officially, the US corporate earnings season kicks off on 15 January with results from (among others) JP Morgan and Wells Fargo, and there could be plenty of surprises in store. According to Factset’s excellent study, we can expect the following:
- Earnings growth: For the fourth quarter of 2024, the estimated year-on-year earnings growth rate for the S&P 500 is 11.9%. If confirmed, this would mark the highest earnings growth rate since the fourth quarter of 2021 and the sixth consecutive quarter of year-on-year earnings growth. This represents a marked acceleration on the third quarter of 2024, when estimated growth was 4.6%.
- Earnings revisions: At 30 September, the estimated growth rate for the fourth quarter of 2024 was 14.5%, but this has been reduced to 11.9% following downward revisions. Eight sectors are expected to post lower earnings today than forecast in September. This trend is consistent with that seen in the third quarter, when the earnings growth rate was also revised downwards from 7.8% to 4.6% over the quarter.
- Earnings guidance: For the fourth quarter of 2024, 71 S&P 500 companies have issued negative EPS guidance and 35 have issued positive guidance. This figure is up on the third quarter, when 60 companies issued negative guidance and 50 positive guidance.
- Valuations: The 12-month price/earnings ratio for the S&P 500 is currently 21.4, above the five-year average of 19.7. This valuation reflects high expectations despite downward earnings revisions.
2025 expected to be a year of growth, but…
For the fourth quarter of 2024, S&P 500 companies are expected to report year-on-year earnings growth of 11.9% and revenue growth of 4.6%. This represents a slight decline from the original forecast of 15% for earnings and 5.2% for revenues but remains the highest rate of earnings growth since 2021. For the full year 2024, analysts forecast earnings growth of 9.5% and revenue growth of 5%, in line with initial estimates.
The outlook for 2025 is much more optimistic:
- First quarter 2025: Expected growth in earnings of 11.9% and revenues of 5.1%
- Second quarter 2025: Estimated growth in earnings of 11.6% and revenues of 5.0%
- Third quarter 2025: Acceleration, with growth in earnings of 15.2% and revenues of 5.6%.
- Fourth quarter 2025: Projected growth of 16.6% in earnings and 6.7% in revenues.
For 2025 as a whole, analysts are forecasting growth in earnings of 14.8% and revenues of 5.8%, confirming a robust recovery.
In summary, although forecasts for the end of 2024 have been adjusted downwards, the outlook for 2025 is for a significant acceleration in growth, driven by solid earnings and revenue momentum in several key sectors.
At sector level
Here are the expectations at sector level:
- Communication Services: The Communication Services sector is expected to post a year-over-year earnings growth rate of 20.7%, the second highest of the eleven sectors. Four of the five industries in the sector are expected to post earnings growth: Entertainment (52%), Wireless Telecommunications (37%), Interactive Media & Services (25%), and Media (8%). On the other hand, Diversified Telecommunication Services is expected to post a decline of -3%. Interactive Media and Services is the main contributor to this sectoral growth.
- Energy: The energy sector continues to be the hardest hit, with an estimated fall in profits of -24.6%, the largest among the sectors. The fall in oil prices (quarterly average of $70.32, 10% lower than in Q4 2023) is weighing on results. Four of the five sub-industries are expected to post declines: Oil & Gas Refining & Marketing (-82%), Integrated Oil & Gas (-26%), Oil & Gas Exploration & Production (-12%), and Oil & Gas Equipment & Services (-1%). Only Oil & Gas Storage and Transportation (+20%) recorded an increase.
- Information Technology: With earnings growth of 14%, the information technology sector is the third-best performer. All industries are expected to grow, led by Semiconductors & Semiconductor Equipment (+35%), followed by Software (+11%), Communications Equipment (+8%) and IT Services (+5%). Semiconductors remain the main driver of this growth.
- Health Care: Health Care is expected to post an 11.7% growth rate in profits. Three of the five industries are projected to be up: Pharmaceuticals (+62%), Health Care Equipment & Supplies (+4%), and Life Sciences, Tools & Services (+4%). However, Healthcare Providers & Services (-7%) and Biotechnology (6%) are expected to record declines.
- Consumer discretionary: With earnings growth of 12.8%, the sector was driven by Amazon, whose profits rose by 47%. Without this contribution, the sector would be projected to contract slightly (-0.2%). The Broadline Retail (+48%) and Automobiles (+12%) segments are expected to post notable growth, while Leisure Products (-13%) and Textiles, Apparel & Luxury Goods (-10%) are predicted to weigh on performance.
The estimated net profit margin for the S&P 500 in Q4 2024 is 12.0%, down slightly on the previous quarter (12.2%), but higher than last year (11.3%) and the five-year average (11.6%). Six sectors are expected to report an annual increase in their profit margin, led by Financials (17.8% vs. 13.4%). Conversely, Energy (8.1% vs. 10.4%) and Materials (9.0% vs. 11.1%) should see the sharpest falls.
A concentration problem
The top 10 companies in the S&P 500 account for 35% of market capitalisation, but only 23% of profits.
This divergence has never been greater, suggesting that the market has never been so optimistic about the future earnings of the top 10 companies in the index.
In other words, the problem with the S&P 500 today is not just its high concentration, but also the record rise in future earnings of a small group of companies. The last thing we need is disappointing earnings.
What are the questions for Q4 2024?
There will of course be several themes to watch out for when US companies issue their results, including:
- Is the euphoria surrounding artificial intelligence waning?
- Are companies starting to feel inflation picking up again?
- Is Trump already spooking the markets or is he a source of optimism for American businesses?
- Are expectations of fewer rate cuts in 2025 likely to change companies’ plans?
Conclusion
The US corporate earnings season will once again be extremely important. Remember that whatever people say, index returns are mainly linked to corporate earnings over the last four years. Any failure to meet consensus expectations is likely to be heavily penalised, and could potentially handicap Trump…