US Earnings Season Outlook 2024: Will Results Match Optimism?

Following a remarkable three-month rally in US stocks, traders are eagerly awaiting the upcoming corporate earnings season. The question is: will reported earnings align with the current optimistic valuations?

Wall Street is bracing for a lackluster earnings season, the weakest since mid-2023. Bloomberg Intelligence data suggests analysts are anticipating a mere 2.5% year-over-year profit growth for S&P 500 companies in Q2. Of the 11 sectors, six are projected to experience a decline in earnings. Furthermore, the index's annual growth forecast has been lowered from 9.4% in early April to 7.1%.

Low Expectations, High Potential?

Despite these modest expectations, the S&P 500 remains near its all-time highs. Lowered expectations may actually be a blessing in disguise for companies, making it easier to surpass forecasts. Bloomberg Intelligence strategists suggest that recent company guidance implies they could readily exceed these conservative estimates.

A key focus will be on profit margins, particularly in light of potential tariff pressures. Analysts are closely monitoring whether and to what extent these tariffs will impact profit margins.

A Closer Look at Five Key Areas

1. Trade War Impact Unclear: Despite concerns about supply chain disruptions and rising costs, there's no concrete evidence yet that tariffs have significantly reduced demand.
2. AI Investment Booming: Major technology companies continue to invest heavily in developing AI products, regardless of the global economic climate.
3. Profit Margin Dip May Be Temporary: S&P 500 companies' profit margins are projected to fall to their lowest level since Q1 2024, but are expected to rebound in subsequent quarters.
4. A Stock Picker's Market: The US stock market is exhibiting a notable divergence in individual stock performance. This necessitates a selective stock-picking approach.
5. Dollar Weakness a Boon: A weaker dollar is expected to benefit US companies with extensive export operations.

AI Takes Center Stage

Artificial intelligence is poised to be a major driver of earnings growth, particularly for large technology companies. Estimates suggest that companies like Microsoft, Meta, Amazon, and Alphabet will significantly increase their capital expenditures in the coming years, largely driven by AI investment.

The diverging performance of individual stocks necessitates a more discerning investment approach. Rather than relying on broad market uptrends, investors should focus on companies with the potential to beat earnings expectations and generate strong cash flow.

European Earnings Outlook

In Europe, analysts have lowered earnings forecasts due to concerns about the impact of trade wars on profit margins. However, the lowered expectations imply that companies may readily surpass forecasts. Additionally, investors will be monitoring the impact of the stronger Euro on the earnings of exporting companies.

In Conclusion

Overall, the upcoming US corporate earnings season presents an opportunity for investors to assess the underlying health of companies amid the current economic landscape. While there are numerous challenges, such as trade tensions and economic uncertainty, there are also opportunities, such as AI investment and a weaker dollar. By focusing on companies with the potential to outperform and exceed expectations, investors can achieve strong returns in this challenging market.