The Bottom Line — Evening Brief – 08.15.24
While the second quarter earnings season is still not officially in the books, 90% of S&P 500 companies have already announced their financial results, it was a record-setting quarter.
“S&P 500 operating earnings per share (EPS) rose 10.9% y/y in Q2 to a record high of $60.19,“ Ed Yardeni and Eric Wallerstein of Yardeni Research wrote this week. “In short, there’s no sign of an imminent recession as S&P 500 earnings rose to a record high during Q2.”
This is encouraging news considering the rise in volatility earlier this month that saw prices whipsaw as market participants tried to back into explanations for suddenly poor conditions. However, the strength of corporate earnings was the one constant.
“As 2Q24 reporting season winds down, we remain struck by how solid the overall stats look,” Lori Calvasina, RBC’s head of U.S. equity strategy, wrote on Monday. “The percent of companies in the S&P 500 beating consensus forecasts on EPS continues to outpace the percent beating consensus forecasts on sales (80% vs. 59%), but both remain up a little from the last reporting season.”
There will undoubtedly be some questions raised by the sales beat rate lagging the earnings beat rate given that weak sales could be an indication of waning demand in a weakening economy.
Nevertheless, it serves as a valuable reminder that the stock market is not the economy. Cost reductions, operational restructurings, enhanced equipment, and the advantages of scale have enabled large corporations to transform modest sales growth into robust earnings growth by increasing profit margins.
Furthermore, discussions regarding layoffs have decreased. This is consistent with analysis from Apollo Global’s economist Torsten Slok. “The media is full of anecdotes from earnings calls about the economy supposedly slowing down,” Slok wrote. “But the reality is that firms on earnings calls talk less and less about recession.”
It is already widely recognized that the labor market is moderating, and the economy is slightly less coiled. Therefore, it is encouraging to hear that concerns regarding the labor market and economic activity have not escalated, as this would further impact the demand outlook. For now, analysts expect modest sales growth to persist with robust earnings growth.
News is only relevant to long-term equity investors to the extent that it is anticipated to affect earnings. It seems most of the recent troubling headlines are not significantly impacting the earnings outlook.