5 Key Takeaways From The S&P 500 Q1 Earnings Season

The recent earnings season provides insights into the financial health of the S&P 500 companies and the health of the U.S. economy. With 92% of firms reporting, 78% have surpassed earnings-per-share expectations and 59% have exceeded revenue forecasts. An above-average number of S&P 500 companies reported positive earnings surprises, quelling fears that the profit cycle had peaked.

Profit margins for the S&P 500 for Q1 in 2024 were 11.7%, which is above the previous quarter’s net profit margin of 11.2%, and above the 5-year average of 11.5%. Seven sectors saw margin expansion while three sectors experienced margin contraction, according to data published by FactSet.

For Q1 of 2024, the year-over-year earnings growth rate for the S&P 500 is tracking 5.4%, the highest growth rate reported by the index since Q2 of 2022. Market reaction to announcements, comments from management and changes to guidance provide more detail behind the numbers.

There are several key takeaways worth noting.

Market Reactions To Earnings Surprises

Broad market volatility may be low at the index level, but companies that miss their top or bottom line numbers have had significant price reactions. Stocks that exceeded expectations enjoyed modest gains, averaging an increase of 0.9%. In contrast, companies that failed to meet expectations faced significant downward price pressure, with their stocks declining by an average of 2.8%. This suggests traders entered the reporting period with little patience and speaks to positioning by active traders with little capacity to withstand drawdowns.

Positive Trends In EPS Revisions And Momentum

Encouragingly, EPS revisions showed resilience. The ratio of upgrades to downgrades has improved, indicating a bullish sentiment among analysts for the fiscal outlook of many companies. Analysts usually start the year with aggressive earnings projections, only to revise them lower as the year progresses. The fact that analysts maintain or even increase their outlook is a positive sign.

Sector-Specific Highlights And Forecasts

The health care, technology, and industrial goods sectors had the highest percentage of earnings beats. Real estate and energy firms had the fewest upside surprises.

The top contributors to earnings growth for the index for Q1 are Magnificent Seven companies, the leading technology companies behind the strength in the S&P 500, including NVIDIA
NVIDIA
, Alphabet, Amazon.com, Meta Platforms, and Microsoft
Microsoft
. These companies clocked an incredible 48% growth in EPS for the quarter. Excluding these seven companies, the S&P 500 would be reporting a year-over-year earnings decline of 2% rather than earnings growth of 5.4% for Q1.

The concentrated earnings leadership highlights the domination of the large technology companies when it comes to driving earnings growth of the S&P 500. Large-cap tech also announced the continuation of enormous stock buyback programs and additional capital investments. According to research done by Goldman Sachs
Goldman Sachs
, total capital expenditures and research and development for the Magnificent Seven are expected to be close to $350 billion this year, a remarkable 61% of operating free cash flow. By comparison, that is three times the amount spent by the index’s other 493 companies.

Insights Into The Economy

One theme from Q1 earnings is the pressure on consumer spending, particularly from households in the lower income quartile. Companies like McDonald’s highlighted that consumers are “more discriminating with every dollar they spend.” Six Flags, which operates 27 theme parks across North America, noted a rise in attendance, counterbalanced by a decline in total guest spending per capita, which fell by 8%.

Hotels, cruise lines, and gaming companies also provided some color on consumer trends. Hotels in the low price tier had to lower average nightly rates to maintain occupancy. However, cruise operators that offered affordable vacations performed well. High-end casino firms like MGM Resorts saw earnings growth of 4% on the quarter. Yet Boyd Gaming
Boyd Gaming
, which tends to attract more price-conscious clientele, saw revenues dip by 5 to 6%.

Etsy
Etsy
, the online marketplace known for its handcrafted goods, missed its Q1 earnings and sales estimates. Its performance was “pressured by the challenging environment for consumer discretionary products,” said Josh Silverman, Etsy, Inc. Chief Executive Officer about recent results. Consumers continue to struggle to adapt to the higher price levels after the postpandemic inflation spike.

Key Dates And A Sector To Watch

A critical date for investors to watch is May 22, when NVIDIA, a closely followed player viewed as a barometer of the AI boom, is scheduled to report its earnings. Expectations are high, and the stock has historically had huge swings following the release. The impact on the technology sector and the entire market shouldn’t be ignored.

Overall, the first quarter earnings season broadly exceeded expectations. It reinforced the importance of large-cap technology to earnings and sales growth and highlighted developing weaknesses and stress in specific consumer spending segments.