As we delve into the Russell 2000 Q1 2024 earnings season, our comprehensive review leverages I/B/E/S, StarMine, and Datastream data from LSEG Workspace, offering both aggregate and individual company insights.
Earnings Commentary
Q1 earnings growth expectations have sharply declined more than usual as we enter earnings season. Over the past three months, Q1 growth projections have been adjusted downward by 21.5 percentage points, settling at a current year-over-year decline of 12.0%. Quarter-over-quarter, Q1 earnings are projected to fall by 12.5%, marking the steepest decline since the inception of the LSEG’s Russell 2000 Earnings Scorecard. These substantial downgrades set a modest threshold for Q1.All sectors, apart from Utilities, have faced downward revisions in their earnings growth forecasts. Notably, Communication Services, Consumer Discretionary, and Information Technology have experienced the most significant reductions.It is crucial to note that Q1 concludes a five-quarter ‘earnings recession’ for Russell 2000 earnings. Analyst estimates suggest a resurgence in earnings over the next three quarters of 2024, potentially pushing the full-year growth forecast to 20.7%.Net profit margins at the index level have declined for four consecutive quarters but are anticipated to rebound later this year, per analyst estimates.Additionally, it is essential to monitor the revenue beat rate and surprise rate alongside actual revenue growth, both of which have trended downward recently. These metrics reinforce concerns about diminishing pricing power and its impact on net profit margins. Currently, Q1 is showing a quarter-over-quarter revenue decline of 4.4%, marking the third consecutive quarter of negative growth. Year-over-year growth is expected to be negative for the fourth consecutive quarter. At this early stage in the reporting season, only 48.0% of companies have surpassed revenue expectations, the lowest rate since this data began to be tracked.
Part 1 – Earnings Growth and Contribution
Using data from the April 25th publication of the Russell 2000 Earnings Scorecard, Q1 blended earnings are forecasted at $16.8 billion (-12.0% y/y, -12.5% q/q) while revenue is forecasted at $447.6 billion (-1.1% y/y, -4.4% q/q).Ex-energy, earnings growth is forecasted at -2.1%, which marks the fifth consecutive quarter of negative ex-energy growth. Ex-energy, revenue growth is forecasted at -0.3%, marking the fourth consecutive quarter of negative growth.From an earnings growth contribution perspective, four sectors have positive earnings growth contribution while seven sectors have negative earnings growth contribution (Exhibit 1).Health Care has the largest earnings growth contribution of any sector for the second consecutive quarter and is forecasted to contribute 10.5 percentage points (ppt). Real Estate (1.5 ppt) and Utilities (0.7 ppt) are the next largest contributors while Energy (-10.5 ppt), Technology (-4.4 ppt), and Materials (-3.5 ppt) are the largest detractors to earnings growth this quarter.
Exhibit 1: Russell 2000 24Q1 Earnings Growth Contribution 
We also look at earnings growth contribution at a constituent level in Exhibit 1.1 and highlight the top 10 and bottom 10 contributors. American Well, Emergent BioSolutions, and Alkermes are expected to deliver the lion’s share of earnings growth for Health Care, albeit due to easier year-over-year comparisons.In the bottom half of the table, Amplify Energy is forecasted to be the largest individual detractor to earnings growth this quarter followed by Bread Financial Holdings and Peabody Energy.
Exhibit 1.1: Russell 2000 24Q1 Earnings Growth Contribution 
Part 2 – Estimate Revisions into Earnings Season
Analysts have significantly lowered earnings expectations heading into this earnings season. Over the last three months, the Q1 bottom-up EPS estimate has decreased from $17.20 to $13.36 per share, resulting in a year-over-year growth downgrade of 22.3%.Exhibit 2 highlights earnings momentum at a sector level, defined as the rate of change in Q1 growth expectations over the last three months, expressed in percentage points. Sector-wise, all but Utilities have experienced a negative shift in earnings momentum this quarter, with Communication Services, Consumer Discretionary, and Information Technology facing the most considerable declines.Over the same period, Energy, Industrials, and Materials sectors have each faced downward revisions in earnings growth expectations for the next four upcoming quarters, including Q1. This trend is followed by Consumer Discretionary, Financials, Real Estate, and Communication Services, which have also experienced downgrades for the next three upcoming quarters.
Exhibit 2: Russell 2000 2024 Q1 Estimate Revisions 
Part 3 – Market Cap vs. Earnings Weights
Exhibit 3 looks at the difference between ‘market-cap’ and ‘share-weighted’ weights for the Russell 2000 sectors. The Russell 2000 Earnings Scorecard utilizes a share-weighted methodology.Financials continue to hold the largest earnings weight for the third consecutive quarter at 47.2%, significantly higher than its market-cap weight of 16.1%. This discrepancy highlights a substantial earnings weight differential, yet it trades at a discount compared to the overall index with a forward four-quarter P/E of 10.8x.In the Energy sector, there is a noteworthy contrast between market-cap weights and earnings weights. Despite a slight decline compared to previous quarters, Energy continues to outperform relative to its market capitalization, with an earnings weight of 18.6% versus a market-cap weight of 7.7%. This indicates that the sector is delivering substantial earnings relative to its size within the index. Additionally, Energy trades at the most favorable valuation of any sector, with a forward P/E of 9.9x.In contrast, the Information Technology sector exhibits both a negative earnings and revenue weight differential relative to its market-cap, yet it commands the highest valuation at 27.3x forward P/E. This discrepancy underscores the sector’s premium pricing, driven by investors’ high expectations for future growth.
Exhibit 3: Market Cap vs. Share-Weight for Russell 2000 Sectors
Part 4 – Which companies have seen the largest revisions heading into earnings season?
We utilize the Screener app in LSEG Workspace to identify constituents who have yet to report that have experienced the most substantial upgrades and downgrades ahead of this earnings season. We include a filter to only include companies that have at least five analyst estimates.In this example, we show the 60-day percent change in the consensus Preferred Earnings mean estimate for the current quarter (Exhibit 4). Preferred Earnings is defined as EPS for most companies except for Real Estate where it can be either EPS or FFOPS depending on analyst coverage.Squarespace has seen the largest downgrade in the Preferred Earnings estimate over the last 60 days (-5,028.0%) followed by EchoStar (-2,900.0%), Guess? (-2,353.3%), Novavax (-2,028.0%), and Talos Energy (-1,462.5%). Note: values less than -100% occur when an EPS estimate turns from positive to negative.
Exhibit 4: Largest Negative Revisions for 2024 Q1 
Source: LSEG WorkspaceExhibit 4 also displays the StarMine for each constituent, which compares the SmartEstimate© vs. Mean Estimate. The PS% is a powerful quantitative analytic that compares the StarMine SmartEstimate© to the consensus mean. The SmartEstimate places a higher weight on analysts who are more accurate and timelier, thus providing a refined view into consensus. Comparing the SmartEstimate© to the mean estimate leads to our PS%, which accurately predicts the direction of earnings surprise 70% of the time when the PS% is greater than 2% of less than -2%.The StarMine© is a quantitative analytic which is used as an input to many of the StarMine models.We see a positive correlation between constituents who have seen a large downgrade and a corresponding negative PS. Furthermore, a positive correlation is shown between the mean estimate change vs. Analyst Revision Model (ARM) score (i.e., companies that have seen large downward earnings revision also have a low ARM score).ARM is a percentile stock ranking model that is designed to predict future changes in analyst sentiment by looking at changes in estimates across EPS, EBITDA, Revenue, and Recommendations over multiple time periods. he last two columns display both the current ARM score and its 30-day change.Looking at the Predicted Surprise and ARM columns can be very useful during earnings season to assess the likelihood of whether companies are expected to beat or miss earnings while at the same time gauging analyst sentiment.The screener app provides a powerful workflow tool for Analysts and Portfolio Managers looking to parse through hundreds of companies during earnings season to identify thematic trends.Exhibit 4.1 displays the same data for constituents with the largest upgrades heading into earnings season.The screener app provides a powerful workflow tool for Analysts and Portfolio Managers looking to parse through hundreds of companies during earnings season to identify thematic trends.
Exhibit 4.1: Largest Positive Revisions for 2024 Q1 
Source: LSEG Workspace
Part 5 – Net Profit Margin Expectations
Quarterly net profit margins, as seen in the Q1 blended figure of 2.8%, have declined for the fourth consecutive quarter (Exhibit 5). Looking forward, margins are expected to rise gradually over the next year based on analyst estimates.Notably, every sector has seen a decline in its Q1 net margin estimate. Health Care has seen the largest decline (-94 bps, current value: -16.0%), followed by Information Technology (-82 bps, 4.1%), and Consumer Discretionary (-73 bps, 2.2%).The Russell 2000 has seen its Q1 margin estimate decline by 59 bps over the last three months.The 2024 full-year estimate is currently 4.0%, while the forward four-quarter estimate is 4.4%.
Exhibit 5: Russell 2000 Net Profit Margin Expectations
Part 6 – Forward P/E & PEG Ratio
Using LSEG Workspace, the forward 12-month EPS is currently $89.75 per share, resulting in a forward P/E (time-weighted) of 22.2x.The 2024 and 2025 EPS estimate of $79.48 and $106.25 per share have declined by 19.6% and 1.4% respectively over the last year (Exhibit 6). In comparison, the Russell 2000 price index has risen by approximately 15.7% over the same period.Using Datastream, The forward P/E of 22.2x has increased over the past three months and now ranks in the 51st percentile since 2002, offering a 10.7% discount to its 10-year average. For reference, the trough forward P/E during the last two recessions were 13.2x (Nov 2008) and 16.1x (March 2020).The ‘PEG’ ratio currently stands at 1.16x, ranking in the 12th percentile since 2002 and representing a 28.2% discount to its 10-year average.
Exhibit 6: Russell 2000 EPS Estimates 
Conclusion
Analysts have significantly reduced earnings expectations heading into this earnings season, effectively lowering the bar for positive earnings surprises. Currently, the Q1 earnings surprise rate stands at 6.7%, with nine out of the 11 sectors experiencing positive earnings surprises.Looking ahead to 2024, both earnings and revenue growth expectations have been declining since August, now standing at 20.7% for full-year earnings. This consistent downtrend highlights the need for vigilant monitoring in the coming months.More By This Author:S&P 500 Earnings Dashboard 24Q1 – Friday, April 26Friday Facts: All You Need To Know About Factor Investing ETFs In EuropeRussell 2000 Earnings Dashboard 24Q1 – Thursday, April 25
