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S&P 493 Earnings Recession Is Over: Morning Brief
This is today’s Morning Brief Takeaway, which you can sign up to receive in your inbox every morning along with:
The S&P 500 is up 17% so far this year.
But as investors have heard repeatedly, this performance can be largely attributed to just a handful of stocks tracking a theme — the Magnificent Seven and AI. In late June, for example, Nvidia (NVDA) alone accounted for more than a third of the S&P 500’s gains this year.
For the other 493 stocks in the benchmark index, both earnings growth and shareholder returns have been more measured. Indeed, as the Bank of America team noted in a note Tuesday, these remaining members of the S&P 500 have been in an earnings recession since early last year.
According to data from BofA’s U.S. equity strategy team, S&P 493 earnings have not posted annual growth since Q4 2022.
After a 2% annual decline in the first quarter of 2023 and a 7% annual decline in the second quarter of last year, this group’s earnings growth has been flat in each of the past three quarters, the firm’s work shows.
However, the upcoming second-quarter earnings period should mark the end of what has been a stealthy earnings downturn for the vast majority of companies in the S&P 500. For the 493 non-Mag 7 stocks, earnings growth is forecast to hit 6%, 7% and 13% annually during the second, third and fourth quarters of 2024.
Now, this growth is still expected to lag behind the overall earnings growth of the index, as most of this earnings growth will be generated by Technology (XLK) and Communications Services (XLC) sectors, which are home to AI beneficiaries such as Nvidia, Microsoft (MSFT), Goal (GOAL) and Alphabet (GOOGL, GOOG). (The healthcare sector, notably, is also expected to see profits rise by double digits in each of the next three quarters, though BofA cautions that this is driven by one-time items coming off Pfizer’s books (PFE) and Merck (MRK).)
Nvidia CEO Jensen Huang delivers his keynote speech ahead of Computex 2024 in Taipei on June 2, 2024. (SAM YEH/AFP via Getty Images) (SAM YEH via Getty Images)
Some on Wall Street have was dismayed by the bifurcated performance between the haves (AI names) and the have-nots (everyone else) in the S&P 500. But we think these numbers help us understand how we got here and where we’re going.
When 2024 began, one of the consensus views on Wall Street was that the market rally would broaden after a 2023 surge defined by the AI theme. So far, this trade has has not been a feature of this market. The fundamentals—namely, earnings growth—help explain why.
The story continues
In each of the last two quarters, the aforementioned Technology sector saw earnings growth of 25% and 27%, respectively; for Communications Services, earnings growth was even more impressive, at 53% and 43% in those periods.
It’s no wonder, then, that these sectors—and the most influential components within them—have been at the center of market conversations and most returns.
AND some strategists choosing to step away talking about the so-called benchmark index as a useful parameter for most investors is also more than sensible in this environment.
As Piper Sandler’s Michael Kantrowitz told Yahoo Finance on Monday, the correlation between the S&P 500 index and its constituents has moved toward a 25-year low. And if the S&P 500 is a proxy for “the market,” and most stocks aren’t trading in line with that market, then what are we really talking about?
Yet, as is often the case in the investment world, this simmering frustration with a market environment that has come to resemble celebrity culture, in which only a few stars grab the headlines, appears set to grow. At what point will stocks that are about “something else” find an investor community eager to think about just that?
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