Earnings growth is expected to accelerate to 8.8% year-over-year pace in the second quarter from 5.9% in the first quarter. Topline sales are forecasted to grow by 4.6% year-over-year in the second quarter, slightly higher than the 4.3% rate in the first quarter. Forward earnings guidance will be crucial as consensus earnings for the second half of 2024 are forecasted to be 12% over last year.
Nine S&P 500 companies are scheduled to report earnings this week to kick off the earnings season, but the primary focus will be bank earnings beginning Friday. There are a handful of other companies on the calendar, like Delta Air Lines (DAL), PepsiCo (PEP), and Progressive (PGR). Among the banks reporting are JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC), and Bank of New York Mellon (BK).
According to FactSet, while the consensus year-over-year earnings estimates for financials call for growth of 4.3%, the banks within the sector are expected to post a decline of 10%. The pace of loan growth has been stagnant, which should weigh on earnings. Credit losses continue the normalization process, so the banks will likely increase reserves to prepare for future losses. Investment banking and wealth management revenues continue to benefit from strong markets.
Aside from the banks, property and casualty insurance companies should post strong earnings growth at 95% with benefits from easier comparisons, improved loss ratios, and higher bond yields. Berkshire Hathaway recently announced a sizable investment in an insurance company stock, Chubb (CB). The details on why Warren Buffett was attracted to Chubb are here.
The communications services sector should report the most robust year-over-year earnings growth at 18.4%. Meta Platforms (META) and Alphabet (GOOGL) are expected to be the most significant contributors to the increase. META has had several quarters of easy comparisons with the prior year; the second quarter is the finale of that trend.
The strength of earnings growth for the healthcare sector is a bit misleading. Merck (MRK) reported a loss in the second quarter of 2023 and is expected to post a profit this quarter. According to FactSet, the healthcare sector’s earnings growth of 16.8% would be -1.1%, excluding Merck.
The technology sector should remain a pillar of strength for earnings growth at 16.4% year-over-year. NVIDIA (NVDA) should be the most significant contributor to the sector’s earnings. NVIDIA’s profits are expected to soar by 235% year-over-year on the strength of demand for artificial intelligence semiconductors.
After the worst sector earnings showing in the first quarter with a 25% year-over-year decline, the energy sector earnings growth is forecasted to outpace the S&P 500 in the second quarter. While natural gas prices saw a slight year-over-year decline, oil prices rose, resulting in an expected rise in revenues for the energy industry. With the tailwind of growing sales, energy companies should have a double-digit year-over-year increase in earnings this quarter.
Two of Berkshire Hathaway’s (BRKA, BRKB) largest publicly traded stock holdings are Occidental Petroleum (OXY) and Chevron (CVX). Berkshire had amassed an almost 29% stake in Occidental with more purchases in June. A previous piece discussed why Warren Buffett’s Berkshire Hathaway favors Occidental Petroleum.
Sales growth is typically closely tied to nominal GDP growth, combining after-inflation economic growth (real GDP) with inflation. Improving estimated nominal year-over-year economic growth supports the consensus estimate of a 4.6% year-over-year sales increase for the S&P 500 with some upside.
Despite a more challenging start to the year, the pace of inflation growth has been easing in the last couple of months, which should help earnings this quarter.
The differential in price growth for producer’s inputs (PPI) versus the price increases hitting consumers indicates that profit margins should be able to hold steady this quarter. The topline sales growth, driven by economic activity in the quarter and stable margins, allows positive year-over-year earnings growth expectations.
The stronger U.S. dollar could have a modestly negative impact on multinational companies this quarter. With approximately 40% of the sales of S&P 500 companies coming from international sources, the dollar can impact profits for companies selling products internationally.
On the surface, the monthly jobs report on Friday was better than expected, with payroll jobs beating expectations. Still, downward revisions to the prior month and an increase in the unemployment rate revealed the softer reality. The “Sahm Rule” has an unblemished track record for predicting recession when the three-month average unemployment rate rises 0.50 percentage points over the three-month average low in the past twelve months. The rise in the June unemployment rate to 4.1% from 4.0% sent the Sahm Rule reading to 0.43 percentage points, dangerously close to triggering the recession signal.
After the last Fed meeting, Federal Reserve Chair Powell noted that he would react quickly to a weakening in the job market, so the softer labor market data sent market odds to an 82% chance of a Fed easing in September. Fed Fund futures are looking for two cuts of 25 basis points (0.25%) each in 2024. The consumer inflation (CPI) reading on Thursday is the next significant indicator since another improving inflation reading combined with the job data could further improve the rate cut odds. Chair Powell’s testimony before Congress on Tuesday and Wednesday should also impact the rate cut probabilities.
The second quarter’s high single-digit year-over-year earnings gains provide a higher hurdle than the first quarter. Still, they should be achievable, assisted by topline sales boosted by solid economic growth. With consensus estimates expecting faster earnings growth in the second half of 2024, much attention will be paid to management’s future earnings guidance. On top of the start of earnings season this week, Chair Powell’s testimony, consumer inflation (CPI), and producer inflation (PPI) will be closely watched for the impact on the timing of Fed rate cuts.