Where Is Earnings Growth Coming From? -

Where Is Earnings Growth Coming From?

May 23, 2024Jeremy ParkinsonFinance0

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What we saw in the Q1 earnings season was a resilient and steadily improving profitability picture, both in terms of the growth rate and the evolving revisions trend. Positive revenue surprises were a bit less commonplace relative to other recent periods, but margins expanded at a better-than-expected rate.

Total earnings for the 474 S&P 500 members that have reported Q1 results are up +4.2% from the same period last year on +3.9% higher revenues, with 77.8% beating EPS estimates and 60.5% beating revenue estimates.

As was the case in the preceding two quarters, the Tech sector remains a key growth driver in 2024 Q1. Had it not been for the robust Tech sector earnings growth, total earnings for the rest of the index would be down -0.6% (instead of +4.2% as a whole).

For 2024 Q2, S&P 500 earnings are expected to be up +9.0% from the same period last year on +4.6% higher revenues. While Q2 estimates have ticked down over the last few weeks, they are still modestly above levels at the start of the period.

In recent days, the earnings focus has been on the Retail sector, with Target (TGT – Free Report) once again coming up short in its quarterly report. Unlike Walmart (WMT – Free Report), which handily beat estimates last week and continues to benefit from market share gains in higher-income households for its grocery-weighted merchandise, Target has to deal with the anemic demand backdrop for its discretionary merchandise.Target is making efforts to make its grocery offerings more attractive through price cuts, but its grocery offerings lack its rival’s heft. Target management flagged signs of stabilization for its discretionary offerings, and relatively easier comparisons to the year-earlier period should help the retailer’s same-store sales results in the current period. Still, the company’s stock price underperformance relative to Walmart is unlikely to reverse any time soon.The chart below shows the year-to-date performance of Target shares relative to Walmart, the Zacks Retail sector, and the S&P 500 index.Image Source: Zacks Investment ResearchWe have discussed the Retail sector’s earnings scorecard and how the sector’s Q1 results stack up relative to the other recent periods in section 1 of this report.The Earnings Big PictureFor 2024 Q2, total S&P 500 earnings are currently expected to be up +9% on +4.6% higher revenues. Earnings estimates in the aggregate have ticked down over the last couple of weeks but still remain above levels at the start of the quarter, as the chart below shows.Image Source: Zacks Investment ResearchWhile the Energy sector has been a big contributor to the strength in estimates, the revisions trend outside of the Energy sector has been favorable as well, as shown in the chart below, which tracks the evolution of index earnings on an ex-energy basis.Image Source: Zacks Investment ResearchThe chart below shows the overall earnings picture on a quarterly basis.Image Source: Zacks Investment ResearchThe chart below shows the overall earnings picture on an annual basis.Below, we show the overall earnings picture for the S&P 500 index on an annual basis.Image Source: Zacks Investment ResearchAs we have noted in this space all along, the Tech sector is firmly in growth mode and is a significant contributor to this year’s growth pace. Had it not been for the +16.1% earnings growth for the Tech sector, total earnings for the index would be up only +6.3%.The Energy sector is a modest drag on this year’s growth pace, with the earnings growth rate improving to +9.9% on an ex-Energy basis. Excluding both the Energy and Tech sectors, 2024 earnings for the rest of the index would be up +12.8%.As we have been flagging here all along, the Tech is enjoying a favorable revisions trend, as the chart below shows.Image Source: Zacks Investment ResearchA big contributing factor to the Tech sector’s positive earnings outlook is the sector’s margins outlook, as the chart below shows.Image Source: Zacks Investment ResearchWe are already in record territory with Tech sector margins, with 2024 margins expected to exceed last year’s record level. The expectation is for some more gains next year and the year after, with the ever-growing share of higher-margin software and services in the overall Tech earnings pie explaining the favorable trend. Part of this likely also reflects optimism about the impact of AI on the sector’s productivity.More By This Author:Retail Earnings: A Closer LookWalmart Earnings And The State Of The Consumer Current Earnings Outlook Reflects Positivity