Lessons Learned Around Earnings Season

What to Focus on During Earnings Season

Through the end of last week, 16% of the S&P 500 companies have reported fourth quarter earnings, with 80% beating earnings per share (EPS) estimates. The blended y/y earnings growth rate is 12.7%, and if it holds, it would be the highest y/y growth rate for the index since Q4 2021.
Earnings season is a time for us to review company performance and provides us with the opportunity to listen to management teams across different industries. We have called earnings season “silly season”, because stock prices tend to be volatile and investors are quick to alter assumptions around companies, all while the long-term outlook may remain unchanged. During this time of the year, we try to focus on winning earnings stories, the companies with good earnings, making higher revisions, that have exciting individual fundamentals and top management teams. Finding companies with strong top-line growth and margin expansion is a recipe for how we invest, and we have seen much of this already during the fourth quarter earnings season. Many companies across our favorite long-term investment themes (aviation, power and grid infrastructure, financial services, and energy technology) boast these qualities. With just 16% of the S&P 500 having already reported fourth quarter results, we have been upbeat about performance and think earnings can grow in mid-high single digits in 2025.

Chart 1: 80% of S&P 500 Constituents Have Reported Above-Estimate EPS Growth

Winning Earnings Stories in Q4

Of the many companies we follow, four stick out as examples of companies that have reported strong fourth quarter results, being GE Aerospace (GE), GE Vernova (GEV), Schlumberger (SLB), and Truist Financial (TFC). These companies span many of our favorite investment themes and are run by strong management teams with exciting fundamentals.

GE has been faced with supply chain difficulties throughout the last three quarters, and CEO Larry Culp has said that it was a number one concern for management. They invested $1 billion into their supply chain and hired over 500 engineers to focus on the problem. As a result, GE redesigned the LEAP engine manufacturing flow, increasing output by 50% in 2024. Additionally, CES services revenue grew 17% in the second half of 2024 compared to the first half, with total engine unit growth up 18% during the same period. Larry Culp has shown strong management skills in the past and is doing it again with GE. When Mr. Culp served as CEO of Danaher (DHR) from 2001-2014, DHR’s stock gained 356% relative to the S&P 500 79% return. Additionally, GE grew orders 46% y/y to $15 billion and boasts a $154 billion backlog, with 90% coming from services. Strong free cash flow in the fourth quarter led to a share repurchase plan of $7 billion with a dividend increase of 30%.

GEV is a similar story. The stock is up 153% since it began trading as a spin-off from GE last March. The fear of DeepSeek disputing the artificial intelligence (AI) story earlier this week put downward pressure on the power generation industry, but our view is that power demand is still a major theme. The number of data centers across the U.S. is expected to nearly double by 2030, and by that time, the AI market is expected to be worth $1 trillion. GEV’s total orders hit a record in the fourth quarter at $13.2 billion, showing 22% y/y organic growth. Equipment orders grew 44% and their total backlog is now worth $119 billion. Specifically, regarding electrification, orders were up 118% y/y with margins expanding 440 bps. GEV remains atop the industry regarding power demand and generation.

The energy sector was one of the worst performers in 2024, but is off to a solid start in 2025, up 5% year-to-date. SLB is an oil field services company that has been negatively affected by the broader sector despite strong recent fundamentals. In the fourth quarter the company reported its highest margins since 2015 and reduced its net debt to the lowest level since 2016. SLB takes a technology-forward approach to its services through partnerships with Nvidia and Amazon to enhance its digital products; digital revenues grew 20% y/y in the fourth quarter and 35% y/y from cloud, AI, and edge technology.

Lastly, the financial sector has a positive setup leading into 2025. A pro-growth Trump administration will bring lower regulation, a better deal-making environment, and a steeper yield curve. Net interest income (NII) growth across major banks has been flat over the past two years, which is likely to flip this year. NII is 72% of TFC’s total revenue, and its management team mentioned that their expectation is for NII to continue to grow in 2025 based on low single-digit loan growth and benefits from fixed asset repricing in their securities and fixed rate loan portfolios. TFC’s investment banking fees and trading revenues rose 46% y/y, residential mortgages rose for the first time in two years, and the company plans to continue its $500 million stock buyback per quarter. Management noted that consumer health remains strong with deposit growth and a 1% increase in loan demand, helping contribute to the NII beat.

There is a lot of noise during earnings season. We try to disregard the noise and focus on prominent management teams that run companies with increasing market share, top-line growth, and margin expansion. Fourth quarter earnings have been strong to date, and we expect this to continue given the U.S. economy is growing above trend with disinflation and healthy consumer activity.

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^[1] Source: FactSet. As of January 24, 2025.

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