S&P 500 Earnings Growth a Key Driver of Market Performance
The outlook for the stock market’s most important driver just keeps getting better. According to data from FactSet, S&P 500 earnings grew 6% in the first quarter compared to the same period last year. When excluding dismal earnings from Bristol Myers Squibb (BMY), the results were even more impressive, with earnings growing 10%, as per Bank of America.
Earnings Estimates for Future Quarters on the Rise
This comes as a welcome surprise, given that earnings estimates for future quarters have been on the rise. Consensus now sees earnings growing 11.4% in 2024, up from a projection of 10.9% just last month. For 2025, earnings growth estimates have moved up to 14.2% from the 11.6% growth seen earlier this year.
Strategists Boosting Year-End S&P 500 Targets
On Tuesday, UBS Investment Bank US equity strategist Jonathan Golub boosted his year-end S&P 500 target to 5,600 from 5,400, citing "stronger earnings." While subsequent quarter earnings estimates typically decline during earnings season, second-quarter estimates have been quite robust, according to Golub. A similar pattern is also evident in full-year 2024 estimates.
Earnings Growth Accelerating
Golub and other strategists have noted that economic "tail risks" have declined, with consensus estimates for economic growth increasing throughout the year. Deutsche Bank chief global strategist Binky Chadha recently told Yahoo Finance that more economic growth than expected could help the S&P 500 reach 6,000 by the end of the year.
Earnings Growth Accelerating and Continuing to Accelerate
But for his current target of 5,500, a large part of the case is built around earnings growth that is "accelerating, and continues to accelerate." Chadha wrote in a research note boosting his year-end S&P 500 target to 5,550 from 5,100 on May 17. "We see the earnings cycle having plenty of legs," he noted. "While all the growth may not materialize this year, we see market confidence in a continued recovery rising by year-end, supporting equity multiples."
Strategists Looking for Rotation in Earnings Growth
Chadha, like other strategists, had been looking for a rotation in earnings growth to begin in the first quarter, with Big Tech’s growth starting to slow and other areas catching up. However, that didn’t quite happen. A basket of stocks Chadha tracks labeled "Mega-Cap Growth and Tech" grew about 39% compared to the year prior, roughly flat from the 40% year-over-year growth seen in the previous quarter.
Robust Earnings Growth in Other Areas
This isn’t an issue in itself, per Chadha. He believes the robust earnings growth seen in this group, which includes the "Magnificent Seven" tech stocks, among a few other big names like Netflix (NFLX), Visa (V), and Adobe (ADBE), is "extremely likely to slow at some point." And that will come as positive developments have been brewing under the surface in other pockets of the market.
Earnings for Cyclicals and Defensives Growing
Earnings for cyclicals and defensives grew at a 7.5% clip in the first quarter, which Chadha noted is "healthy." Other strategists believe a similar catch-up scenario is set to take place in earnings growth throughout the rest of this year.
Broadening Earnings Growth
Bank of America US and Canada equity strategist Ohsung Kwon highlighted in a recent research note that Nvidia drove 37% of the S&P 500’s earnings growth over the past 12 months. In the next 12 months, it’s expected to represent just 9%. "We don’t think it’s just about Nvidia anymore," Kwon told Yahoo Finance. "The market is starting to look at other areas, like cyclicals and defensives, for earnings growth."
Key Trend for Investors Throughout the Year
In the first quarter, companies that beat estimates for revenue outperformed those that just beat estimates on earnings, according to Josh Schafer’s analysis of the latest stock market news. To Gordon, this was the market singling out companies that were just increasing earnings through cost-cutting.
Conclusion
The outlook for the stock market’s most important driver continues to improve. With S&P 500 earnings growth accelerating and earnings estimates on the rise, strategists are boosting year-end S&P 500 targets. As investors look ahead to the rest of the year, they should keep an eye on areas like cyclicals and defensives, which have been growing steadily.
Key Takeaways
- S&P 500 earnings grew 6% in the first quarter compared to the same period last year.
- Earnings estimates for future quarters are on the rise, with consensus now seeing earnings growing 11.4% in 2024 and 14.2% in 2025.
- Strategists are boosting year-end S&P 500 targets, with some predicting the index could reach 6,000 by the end of the year.
- Earnings growth is accelerating and continuing to accelerate, driven by a rotation in earnings growth from Big Tech to other areas.
Recommendations
Investors should keep an eye on areas like cyclicals and defensives, which have been growing steadily. They should also consider boosting their exposure to the stock market, given the improving outlook for S&P 500 earnings growth.
