Liz Ann Sonders: Market Snapshot November 2024

by Liz Ann Sonders, Chief Investment Strategist, Charles Schwab & Company Ltd.

Hi, everyone. I’m Liz Ann Sonders and this is the November Market Snapshot. Excuse my voice. It’s been a long week. Speaking of which, I know the election is on everyone’s mind, but I’m here to distract you from that for the next 10 minutes or so because there’s another important story being told these days, and it’s about the health of corporate earnings. Given we are soon closing the books on third quarter reporting season, this video will dissect the results so far.

[High/low chart for Another hook up in earnings growth for 1Q24, 2Q24 and 3Q24 S&P 500 y/y earnings growth is displayed]

Now, as shown via the green line in this chart, after steadily declining since midsummer, now that companies have been reporting, there has been a hook higher in what is called the blended growth rate. That’s the combination of the 399 reports already in the books with the consensus estimates for those not yet having reported. That blended growth rate is now expected at 7.8%. That’s been trending down recently, at least slightly. In aggregate, companies are reporting earnings 7.3% above expectations, which is an above average rate back to 1994. But you can also see that third-quarter estimates are still well below the results for the prior quarter shown via the orange line.

[High/low chart for 4Q24, 1Q25 and 2Q25 S&P 500 y/y earnings growth is displayed]

In addition, unlike for the second quarter when estimates hooked higher once first quarter reporting season had concluded, there has been no interruption in the downward trend in estimates for fourth quarter of 2024 or the first two quarters of 2025, as you can see in those top three lines.

[High/low chart for Top- and bottom-line beat rates trending lower for S&P 500 earning beat rate is displayed]

Also trending lower is the so-called earnings beat rate. As a reminder, the beat rate is the percentage of companies reporting earnings and/or revenues above the consensus estimates. Now, the earnings beat rate is currently tracking a little less than 76%, which is better than average, but worse than the average over the past year.

[High/low chart for S&P 500 revenue beat rate is displayed]

But it’s not just bottom-up earnings growth that matters. The beat rate for top line revenue growth is tracking at only 59%, which is below average since 2002. Now, the blended revenue growth rate is tracking at just above 5%, and the percent by which companies have beaten revenue estimates so far is running up 1.6%. That’s slightly above average.

[High/low chart for Misses’ punishment vs. beats’ rewards for average S&P 500 member return in excess of S&P 500 return when EPS and sales for beats is displayed]

Now, let’s have a look at how stocks are reacting to earnings to-date. The chart here shows stocks’ returns relative to the overall S&P 500 on the first trading day after earnings releases. As you can see, stocks of companies beating estimates have had a 2% positive performance spread over the S&P 500 Index itself.

[High/low chart for average S&P 500 member return in excess of S&P 500 return when EPS and sales for misses is displayed]

On the other hand, stocks of companies reporting weaker-than-expected earnings have underperformed the index to the tune of nearly 4%. And you can see this trend of misses being punished more than beats are rewarded is continuing a pattern in place for the past couple of years.

[High/low chart for Mag7 earnings growth down, rest of market trending up for Magnificent 7 EPS y/y growth is displayed]

Now, let’s dissect earnings a bit more, in this case with a comparison between the Magnificent 7, or Mag7, and the S&P 500, excluding those stocks. Now, for those not up to speed on the latest market lingo, the Mag7 represents what were, at least last year, the seven largest stocks in the S&P 500. Those would be Nvidia, Apple, Microsoft, Amazon, Alphabet, Meta, and Tesla. By the way, they are no longer the seven largest stocks. Interestingly, Berkshire Hathaway has leapfrogged Tesla into the seventh spot. They are also, by the way, not the best performers. Year-to-date, Nvidia is ranked number three. Tesla is actually ranked 359^th place. That said, for lots of reasons, I suppose, the moniker of Mag7 and its constituents have stuck.

[High/low chart for S&P 500 ex-Magnificent 7 EPS y/y growth is displayed]

What is remarkable is the massive 50 percentage point spread earlier this year between the earnings growth rate of the Mag7 and the rest of the S&P 500. Since then, though, it’s expected that Mag7 earnings growth will continue to slow to a range between 15- to 20% or so through 2025, while at the same time, the rest of the index’s earnings are expected to accelerate, call it to a 10- to 15% range. That said, expectations for third quarter earnings for the Mag7 were only 20% prior to the group’s actual earnings releases, and as you can see, that is now up to 30%. So far, that’s been what was surprisingly few adjustments to subsequent quarters.

Now, the conversion that’s underway between Mag7 earnings and the rest of the S&P 500 helps explain some of the rotations and broadening out we’ve seen in the market since mid-summer. We do expect rotations in sector leadership will persist, including at times back to the mega-cap tech and tech-related stocks, inclusive at times of the Mag7.

[Table for Improving sector breadth re: earnings outlook for Earnings by sector y/y is displayed]

Now, speaking of sectors, let’s widen the lens, and look at not only the progression of earnings for the overall S&P Index into next year, but for each of the S&P 500’s 11 sectors.

[Yellow highlight for 3Q24 earnings by sector y/y]

Breadth so far is somewhat weak for the third quarter, with three of the 11 sectors’ growth rates in negative territory, and big time for the energy sector. That lessens to two sectors in the fourth quarter, and only one sector in next year’s first quarter. At least based on consensus estimates, by the second half of next year, all 11 sectors will be in positive growth rate territory to the tune of nine out of 11 sectors actually in double-digit growth territory in the fourth quarter.

But I’d now like to interrupt this video with a public service announcement. I would not put a lot of faith in 2025’s estimates. We harken back to the early days of the pandemic. There was a record-breaking number of companies that withdrew earnings guidance altogether to analysts. Since that point, although companies are generally back to providing guidance, it’s with less precision than was the case pre-pandemic. As a result, what analysts have become accustomed to doing is basically waiting until earnings season to adjust the subsequent quarter’s estimate. Since third quarter reporting season began, estimates for the fourth quarter have actually moved down from close to 13% to now about 10% as you can see in the column to the right of that yellow boxed column. At the same time, there has been only minuscule downward adjustments to 2025 estimates.

Now, a key takeaway of that assessment is that valuations, as many know, are pretty rich for many segments of the market, while being predicated on double-digit earnings growth expectations next year, which in turn assume record-breaking profit margins. As many viewers and readers of our work know, we have focused a lot on factor-based trends and leadership. Now, as a reminder, a factor is just a fancy word for a characteristic. And we have had a bias in the past year or two toward high quality in terms of factor leadership opportunities. Those would include strong balance sheets, high interest coverage, and healthy free cashflow. As we look into next year, we would also place a premium on profitability-based factors, like earnings revisions, positive earnings revisions, and profit margin trends.

[List of Takeaways is displayed]

Here are some other final takeaways. Earnings so far this season are pretty good, but the outlook for earnings is a bit murkier. Beat rates on both bottom- and top-line growth have been trending down, with notably weaker revenue trends relative to earnings trends. Profitability remains key, witnessed by the ongoing trend of misses being punished more than beats, while profit trends looking ahead continue to favor the Mag7, but to a lesser degree relative to the rest of the market. All that said, the outlook for corporate earnings next year remains healthy, but I would expect a lot of volatility, including based on post-election uncertainty, especially with regard to tariffs. But we do at this point expect some improvement in the breadth of earnings from a sector perspective.

So that’s it for now. More to come on this and election topics, but in the meantime, thanks as always for tuning in.

[Disclosures and Definitions are displayed]

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