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A ‘Robust’ Earnings Outlook Is Driving Even More Optimism for Stocks in 2024
The perspective for the most important engine of the stock market It’s getting better and better.
S&P 500 (^GSPC) profits grew 6% in the first quarter from a year ago, according to data from FactSet. When excluding dismal Bristol Myers-Squibb earnings (BMI), the results were even better, with profits growing 10%, according to Bank of America.
This comes at a time when earnings estimates for future quarters are also rising. The consensus now sees profits growing 11.4% in 2024, up from the 10.9% projection on April 5. In 2025, earnings growth estimates rose to 14.2% in 2025 from the 11.6% growth seen that day.
On Tuesday, UBS Investment Bank U.S. equity strategist Jonathan Golub raised his year-end target for the S&P 500 to 5,600 from 5,400, citing “stronger earnings.”
“Although subsequent quarter earnings estimates typically decline during earnings season, [second quarter] the estimates were also quite robust,” Golub wrote. “A similar pattern is also evident in the full-year 2024 estimates. All of these trends further support market growth.”
Profits are one of several reasons why Wall Street strategists have increased their year-end S&P 500 targets. Golub and others noted that economic “tail risks” have diminished, with Consensus estimates for economic growth increasing throughout the year.
Deutsche Bank chief global strategist Binky Chadha recently told Yahoo Finance that higher-than-expected growth in the economy could help the S&P 500 reach 6,000 by the end of the year. But for its current target of 5,500, a large part of the argument is based around earnings growth that is “accelerating and continues to accelerate.”
“We see the earnings cycle will have many legs,” Chadha wrote in a research note raising his year-end target for the S&P 500 from 5,100 on May 17 to 5,550. “While all the growth may not materialize this year, we see market confidence in a continued recovery increasing through the end of the year, supporting equity multiples.”
Chadha, like other strategists, was looking for a rotation in earnings growth starting in the first quarter, as Big Tech’s growth begins to slow and other areas recover. This did not happened. A basket of stocks that Chadha tracks called “Mega-Cap Growth and Tech” grew about 39% year-over-year, roughly flat to the 40% year-over-year growth seen in the previous quarter.
This is not a problem in itself, according to Chadha. He believes the robust earnings growth seen in this group, which includes the “Magnificent Seven” technology stocks, among some other big names like Netflix (NFLX), Visa (V) and Adobe (ADBE), is “extremely likely to slow down at some point.” And this will happen as positive developments are emerging in other sectors of the market.
The story continues
Earnings for cyclical and defensive companies grew 7.5% in the first quarter, which Chadha noted was “healthy.” Other strategists believe a similar recovery scenario is likely to play out in earnings growth during the rest of this year.
Bank of America US and Canadian equity strategist Ohsung Kwon highlighted in a recent research note that Nvidia has driven 37% of the S&P 500’s earnings growth over the past 12 months. Over the next 12 months, it is expected to represent just 9%.
“We no longer think it’s just about Nvidia,” Kwon told Yahoo Finance. “Things are broadening out… into energy, commodities, utilities, things like that.”
Strategists like Kwon say the most notable point in the stock’s fundamental story was the cost reduction that drove profit growth, not the increase in demand and rising revenue. Kwon and Bank of America remain firm in their belief that this situation will change later this year, as companies in the industrial sector have signaled that they believe they have reached the trough of declining demand in their cycle.
“In the second half of the year, we will start to see demand recover,” Kwon said. “And with that we will see operational leverage and better margins.”
Charles Schwab senior investment strategist Kevin Gordon noted that this will be an important trend for investors throughout the year. In the first quarter, companies that beat revenue estimates outperformed those that just beat earnings estimates.
For Gordon, this was the market that highlighted companies that were simply increasing profits by reducing costs.
“The market tends to sniff [cost-cutting] say at some point, OK, now we have to actually see real demand come back online,” Gordon told Yahoo Finance.
Traders work on the floor of the New York Stock Exchange (NYSE) on January 29, 2024, in New York City. (Spencer Platt/Getty Images) (Spencer Platt via Getty Images)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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