Near 80% Earnings Beats in Q1

1.Equity Markets Rebound. Following the 5% pullback in the SPX from recent highs, the index reversed course last week with a 2.5% rally driven by stronger earnings, continued AI momentum and in-line inflation expectations. 46% of S&P 500 companies have reported Q1 earnings. 77% have beat earnings per share estimates, with 60% beating revenue estimates. The current blended y/y earnings growth rate is 3.5%, and eight sectors are reporting higher earnings than what was expected at the end of Q1.¹ 

The communications services, industrials, financials and consumer discretionary sectors are seeing the best earnings outperformance relative to expectations. The blended net profit margin for Q1 is 11.5%, in line with the 5-year average. Importantly, the percentage of companies issuing negative guidance for Q2 has been below the 5- and 10-year averages. We believe earnings growth will continue to be robust and finish the quarter strong, with full-year y/y earnings estimates near 10%. 

Chart 1: 77% of the S&P 500 Companies Are Beating Earnings Estimates² 

2. Tech Earnings Help Lift Markets Higher. Tech was the bright spot last week with Microsoft (MSFT) and Alphabet (GOOGL) both reporting solid results. MSFT and GOOGL’s cloud businesses continue to grow at solid paces and AI investments are paying off. Skyrocketing capex from big tech is going towards chip technologies, networks, server companies and cloud providers. Many tech companies have reported positively on their AI-related books of business, including IBM (IBM) and Lam Research (LRCX). According to Trivariate Research, “net margins for companies mentioning AI keywords in the Q&A portion of their earnings calls have already seen material margin expansion versus those growth companies with no mentions, after the two buckets had highly correlated margin profiles for the median decade.” 

Representing a continued divergence that we have seen within big tech’s performance this year, Meta (META) declined nearly 8% last week after disappointing revenue guidance and raising its capex expectations for the year. This quarter, MSFT and GOOGL have realized growth from the billions of dollars of cloud and AI investments, while META has now reversed course from its “year of efficiency” in favor of higher AI/technology investments. The stock pulled back due to the payoff of 2-3 years.   

While tech earnings have been strong so far, plenty of other companies and sectors have shown strength. The consumer staples sector has been one of the best performing sectors this earnings season, with 87% of companies beating earnings estimates – which shows strong consumer spending. Financials have reported a rebound in capital markets activity. Med-tech companies have also reported double-digit growth against high expectations. Supply shortages remain abundant across aerospace, housing, energy infrastructure and other industrial-related sectors, which also support many of the materials and commodity suppliers. With above-trend GDP, stimulus continuing to flow through the economy and the labor market remaining supportive of consumer activity, companies are clearly benefiting. Many more companies will report Q1 earnings over the next few weeks, with 35% reporting this week alone. 

3. GDP Below Expectations, Inflation Better-Than-Feared. The U.S. economy grew at a 1.6% annualized rate in Q1, below estimates of 2.5% and the Atlanta Fed GDP estimate of 2.9%. As is typically the case, the numbers will likely be revised, and we believe they will be revised higher given the underlying momentum from the consumer. In fact, within the PCE report on Friday, the income and spending figures for March were higher than expected with y/y growth of 2.5% and services spend up 4% – its highest quarterly gain since 3Q 2021. Recall, the Q1 GDP follows a 3.4% gain all of last year. The concern remains on the inflation front where core PCE rose at a 3.7% annualized rate in the quarter. Markets sold off and yields jumped on the release that growth may be slowing with inflation still above the Fed’s goal.  

The report brought increased fears of “stagflation,” an economy with low growth and high inflation. We do not see this as a base case due to the high levels of consumer spending and strong labor market, though we are always paying attention to any changes in the data. Although inflation is showing some stickiness near 3%, it’s down significantly from its 9% peak, and history has shown not to bet against the U.S. consumer, especially as earnings rebound. This economy can sustainably grow above-trend, which will propel earnings and thus stock prices. 

Friday, headline and core PCE broadly came in line with consensus at 2.7% and 2.8% y/y, respectively. Markets reacted positively to the data print since expectations for a hot month became elevated following the GDP data. Yields across the Treasury curve traded mostly lower, with equities gaining over 1% – a reversal from prior weeks. Investors will get a gauge on the Fed’s current sentiment – following March CPI, Q1 GDP and March PCE data – during this week’s FOMC meeting.  

Chart 2: Inflation Is Falling to the Fed’s 2% Goal, GDP Staying Above Trend³ 

4. Fixed Income. U.S. Treasury yields continued to rise last week, despite U.S. GDP missing expectations, as inflation indicators remained elevated. U.S. 2-, 10- and 30-year Treasury yields rose 1, 4 and 6 bps, respectively. High yield spreads tightened by 18 bps to +347 bps. Muni yields increased 4-7 bps across the curve. This is a big week in fixed income, with the Treasury Quarterly Refunding Announcement on Monday and Wednesday and the FOMC May meeting Wednesday afternoon.  

5. The Week Ahead. 

Earnings – Monday: ON, DPZ, PARA, NXPI; Tuesday: AMZN, LLY, MCD, PYPL, AMT, KO, SBUX, AMD, SYK, PINS, MDLZ, SWSK; Wednesday: MA, PFE, CVS, MAR, EL, QCOM, EBAY, ZG, MGM, ETSY; Thursday: AAPL, REGN, W, CI, BHC, CMI, BDX, BKNG, EXPE, AMGN, SQ, ILMN; Friday: HSY. 

Economics – Tuesday: ECI, House Price Index, Chicago PMI, Consumer Confidence; Wednesday: FOMC Meeting, Mortgage Purchase Applications, ADP Employment Report, Construction Spending, ISM Manufacturing Index, JOLTS; Thursday: Weekly Jobless Claims, Factory Orders, Trade Balances, Productivity; Friday: Non-farm Payrolls, Unemployment Rate, Average Weekly Hours/Earnings, ISM Non-Manufacturing Index. 

Stephanie Link’s TV Schedule: 

Return for Selected Indices⁴ 

Sources

1. FactSet. As of April 26, 2024.
2. FactSet. As of April 26, 2024.
3. FactSet (Chart). As of April 26, 2024.
4. Bloomberg. As of April 29, 2024.

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