We Needed a Strong US Earnings Season, and We Got It!

We're well into the US earnings season for the first quarter 2024. More than 450 of the 500 S&P 500 companies have delivered their results today, and it's time for a status.

This earnings season holds a significant weight in the current market conditions. The US interest rate cuts, initially intended to bolster the market, have been repeatedly delayed due to persistent US inflation. Following the recent Fed interest rate meeting, the market anticipates only one or two rate cuts this year, starkly contrasting the six potential cuts expected earlier in the year.

It comes at a time when US stock valuations are well stretched and 'expensive' from a historical perspective. When interest rates are high, stock valuations should, all else being equal, be lower (at least in theory). Conversely, the market can better live with high valuations when interest rates are low. The current situation with high interest rates and 'expensive' valuations underscores the importance of the ongoing earnings season.

Fortunately, we have seen many solid earnings reports for the first quarter 2024. Just four weeks ago, expectations were that the S&P500 companies' total earnings would grow by 3% in the quarter compared to last year, according to research firm Refinitiv. Today, corporate earnings are expected to grow by as much as 7% (see graph below).

The majority of companies have also delivered earnings above analyst expectations. Almost four-fifths (77%) of companies have exceeded analysts' consensus estimates. While it is customary in the US 'beat guidance culture' for companies to beat analyst estimates, this season, we have seen more than the 'typical' two-thirds (66%).

Notably, the 11 sectors of the S&P500 are experiencing varying degrees of earnings growth. The 'tech sectors', including communication services (with Alphabet (NASDAQ:GOOGL) and Meta platforms), consumer cyclicals (with Amazon (NASDAQ:AMZN)), and the technology sector (with Microsoft (NASDAQ:MSFT) and Nvidia (NASDAQ:NVDA)), are at the forefront, bolstering index-level earnings.

These positive company-specific results have been crucial in balancing the market weakness otherwise created by the macroeconomic headwinds. Despite the market weakness in April, which raised concerns about a larger correction, the strong corporate earnings reports have alleviated some worries and ensured that the S&P500 has restored most of the lost April territory.

Jakob Westh Christensen, eToro Market Analyst