The US second-quarter earnings season has continued to paint a relatively constructive picture of the corporate earnings backdrop, despite the pullback in the S&P 500 over the last few weeks.
Overall, 78% of companies have reported actual EPS above estimates, which is slightly above the 10-year average of 74%. In aggregate, companies have reported Q2 earnings that are 4% above estimates, which is marginally below the 10-year average of 6%.
The Q3 bottom-up EPS estimate has decreased by -1.8%. This is in line with average trends, although contrasts with small upgrades last quarter.
Aggregate earnings growth picked up to 11% year-on-year, which is the highest rate of growth since Q421. Revenue growth edged up a touch to 5.2%, with margins lifting further (and remaining well above historical averages) to deliver low double-digit earnings growth.
Looking ahead, consensus expectations are for market earnings growth of 11% for full-year 2024 and a bullish 15% in 2025.
One-year forward estimates over the past month have edged back, but only very marginally. Estimates for CY24 have been relatively stable so far this year (down 1%), while estimates for CY25 have edged up about 1%, so the overarching story for earnings continues to be a resilient corporate earnings cycle.
Tech Still the Growth Engine, but the Bar for Share Price Gains Proves High
The US technology sector has again delivered strong earnings growth. Indeed, the Magnificent 6 mega cap tech plays delivered an impressive 39% earnings growth for the quarter. This compares to 5% cap weighted growth for the S&P 500 ex the big tech 6 and 8% growth for the S&P 500 on an equal weighted basis.
While the earnings performance of the US technology sector was once again strong, share price reactions to the big tech results were significantly less positive than in recent reporting seasons.
This likely reflects the reality that the bar for incremental positive surprise has been progressively raised over the past year. The very strong share price gains in the mega cap tech sector have been driven by a succession of strong quarters, as well as the increasing excitement toward the AI opportunity.
As a result, while earnings growth trends for mega cap tech remain strong and revision trends (ex-Tesla) remain good, the market did find fault with a number of the tech results. Additional share price weakness in recent weeks has emanated from macro and technical (carry trade) related unwinding of “risk-on” bets centred around the US tech sector, although share prices have once again bounced over the past week or so.
Read Markets Hit Some Turbulence
AI investment ramps up
Apple, the world’s largest company, delivered a reasonably solid result with a relatively neutral share price reaction. The Microsoft result was a small beat, however the market was disappointed with a small miss from the cloud business. In what proved to be a significant theme across the Magnificent 7, the market was also alarmed by higher-than-expected capital spending with respect to AI. This was the dominant theme emerging from the market’s negative reaction to the Alphabet result, even though the overall earnings metrics flowing from the results were impressive. In contrast, while capex was also up in the Meta result, the sheer strength of the overall result saw a very positive share price reaction. After factoring in a lot of AI upside for the big 6 over the past year, the market appears nervous that returns to (growing) capex may take longer than expected.
US Consumer Slowing a Bit
The Amazon result actually delivered upside surprise in the cloud business, alongside a lift in AI capex. However it was evidence of emerging weakness in the core consumer business that prompted the market to sell down the stock. The theme of an emerging consumer weakness was notable in a number of non-tech results e.g. Visa, Home Depot, Airbnb and Trip Advisor, although retail heavyweight Walmart called out a resilient consumer in respect of its value conscious offering.
Finally, from a Magnificent 7 perspective, Tesla once again delivered an underwhelming result. CY24 earnings are set to come in significantly negative relative to CY23, as slowing EV take up and rising competition forces Tesla into price discounting which crimps margins. The company once again was emphasising the upside story around autonomous vehicles, with Tesla’s Robotaxi day due in October.
Total Returns |
EPS revisions 1 Yr Fwd |
12 month Forward PE |
Consensus EPS growth |
|||||
1 mth |
12 mth |
90 day consensus |
Current |
1 year ago |
CY24 |
CY25 |
CY26 |
|
| Apple Inc | -3.9% | 25.3% | 3.4% | 29.8 | 30.1 | 7% | 12% | 16% |
| Microsoft Corp | -8.7% | 29.6% | -0.4% | 30.8 | 31.8 | 12% | 14% | 17% |
| NVIDIA Corp | -10.1% | 164.4% | 14.1% | 35.0 | 49.3 | 125% | 41% | 17% |
| Alphabet Inc | -11.2% | 27.5% | 1.2% | 19.9 | 20.7 | 32% | 14% | 15% |
| Amazon.com Inc | -12.5% | 23.7% | 2.0% | 31.2 | 62.5 | 63% | 23% | 26% |
| Tesla Inc | -16.3% | -10.8% | -6.4% | 72.0 | 69.2 | -25% | 35% | 26% |
| Meta Platforms Inc | 5.9% | 75.4% | 4.8% | 22.8 | 23.1 | 43% | 14% | 15% |
Source: Refinitiv, Wilsons Advisory.
Tech Takes a Breather, but Earnings Foundations Remain Solid
In short, recent tech underperformance is not unexpected in the context of the run in the sector over the last 18 months or so. Despite recent weakness, results were once again generally strong and we still see strong medium-term growth prospects for large cap tech. We don't see the sector as being in a valuation bubble, although we view the sector as being reasonably fully priced, at least in the near term.
We see potential for more even performance across the S&P 500 over the next six months. A notable rotation from tech into the rest of the market and smaller cap companies started just over a month ago, as expectations for Fed easing increased. The rotation trend has been buffeted by macro concerns recently, but Fed easing and a soft landing should encourage broader market performance.
It is too early to say whether a slowdown in the US economy, while positive from an inflation and interest rate perspective, will pose significant risk to the US earnings outlook. As discussed, US earnings estimates have remained remarkably resilient so far this year. Our view is that there is likely to be some downside to CY25 estimates of 15% growth, though downgrades are likely to be moderate rather than severe, given both the likelihood of continued (but slower) economic growth and the secular tailwinds behind the US earnings cycle (tech).
Earnings strength still the key to the US market
The US market’s PE multiple has eased back a touch over the last month, but remains elevated versus history. We believe the PE rating of the US market, while full, is broadly justifiable, based on the strong structural outlook for US corporate earnings growth. We believe some further moderate PE contraction is more likely than a new round of PE expansion. However, the medium-term to longer-term earnings outlook continues to be attractive.
As a result, we remain constructive on the US market in an absolute sense, although its strong outperformance appears to be fading, at least for now. We remain neutral global equities. The impending US election is also likely to restrain US market return over the next few months. The US market should, all things equal, perform better in the months immediately after the November election. The US market’s structural earnings advantage suggests it remains well placed over the medium to longer term.
Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.
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