Within the S&P 500, 111 companies reported earnings last week, and 75% of S&P 500 firms reported better-than-expected earnings for the quarter. The third-quarter earnings season enters its busiest reporting week, with 170 S&P 500 companies scheduled to report.
The Magnificent 7, consisting of Microsoft (MSFT), Meta Platforms (META), Amazon.com (AMZN), Apple (AAPL), NVIDIA (NVDA), Alphabet (GOOGL), and Tesla (TSLA), feature heavily in the upcoming earnings week. Five of the seven companies report earnings this week: Alphabet on Tuesday, Meta and Microsoft on Wednesday, and Amazon and Apple on Thursday. Tesla reported much better-than-expected earnings last week, and NVIDIA won’t report until late November. Because these companies are a critical driver of earnings growth and a significant percentage of the S&P 500’s market capitalization, the quarterly results will be crucial to stock performance this week.
Other scheduled companies include McDonald’s (MCD), Visa (V), Starbucks (SBUX), Merck (MRK), Mastercard (MA), Uber Technologies (UBER), Chevron (CVX), ExxonMobil (XOM), and Berkshire Hathaway (BRK/A, BRK/B).
The S&P 500 fell by 1% for the week. The Magnificent 7 gained 3.5%, primarily due to a 22% gain in Tesla, which had excellent earnings and a positive profit outlook.
After a long trend in the opposite direction due to the better-than-expected monthly jobs report, the more economically sensitive cyclical stocks underperformed the less economically exposed defensives.
According to FactSet, the financials and consumer discretionary sectors were the most significant contributors to last week’s earnings growth improvement. Within financials, Capital One Financial (COF), KKR & Co (KKR), Northern Trust (NTRS), and Raymond James Financial (RJF) were significant positive contributors. The increase in profits for industrials came primarily from General Motors (GM) and Tesla (TSLA).
Relative to expectations at the end of the quarter, the energy, healthcare, and industrials sectors have been the most significant detractors of S&P 500 earnings growth. Earnings estimates for energy companies, including Chevron (CVX) and Exxon Mobil (XOM), were cut, sending the energy sector estimates to -27.3% year-over-year after expecting a -19.1% at the start of the earnings season.
Boeing (BA) reported worse than the previously announced preliminary results, sending the industrials sector estimates to -11.0% year-over-year versus 1.3% growth at the start of the earnings season.
Healthcare sector earnings, expected to be a bright spot this quarter, have fallen to an expected 5.8% growth rate compared to 11.2% year-over-year at the end of the quarter. The primary culprit was Eli Lilly (LLY), which saw earnings estimates revised lower after an announcement that acquisition-related charges for in-process research and development (IPR&D) would lower profits by approximately $2.83 billion or $3.08 per share.
Sales growth is closely tied to nominal GDP growth, which combines after-inflation economic growth (real GDP) with inflation. At this point in the earnings season, sales growth has exceeded expectations, with the tailwind from solid year-over-year nominal GDP.
So far, the blended earnings performance has underperformed expectations at the end of the quarter. Combining actual results with consensus estimates for companies yet to report, the blended earnings growth rate for the quarter is at +3.6% year-over-year, below the expectation of +4.4% at the end of the quarter, but an improvement over the previous week’s 3.4%.
Beyond earnings, this Friday marks the release of the October monthly jobs report. Last month’s blowout September jobs report marked a positive change in sentiment about how quickly the economy might be slowing and removed much of the fear about any impending economic recession. The Atlanta Fed’s current estimate of third-quarter GDP growth is a robust 3.3%. While the better-than-expected growth has supported earnings estimates and thus stock prices, bond yields have risen sharply off the recent lows.
The additional rate cuts expected in 2024 are two successive 25 basis point (0.25%) cuts in November and December. While the probability, based on the pricing of Fed Fund futures, remains high, they fell from higher conviction levels as recent economic data has been robust. A weaker- or stronger-than-expected monthly jobs report this week could significantly impact the rate cut expectations.
The busiest week of earnings season has five Magnificent 7 companies reporting earnings. Given the superior expected earnings growth rates and the market capitalization, the Magnificent 7’s quarterly results and outlooks will be crucial for this earnings season and stock performance this week. The earnings outlook from management remains critical, with expectations high and the S&P 500 selling for a not inexpensive 23 times the forward twelve months earnings estimates.
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