As the daffodils bloom, signaling the arrival of spring, it’s also time for the earnings season to commence for the first quarter. Despite the S&P 500’s impressive double-digit rally to start the year, expectations for Q1 remain modest, with analysts forecasting just under 4% earnings growth. However, forecasts suggest a significant acceleration, culminating in double-digit earnings growth by year-end.
In a trend reminiscent of the previous year, the Magnificent 7 are anticipated to drive all of the growth in Q1, yet a surge in growth from the broader market is expected to provide a substantial tailwind for the remainder of 2024 and into 2025. Analysts continue to underestimate the potential of the remaining 493 companies; last quarter’s predictions of only 1% earnings growth proved far too conservative as earnings surged approximately 8%. This quarter is likely to exceed expectations once again.
Beyond the Artificial Intelligence (AI) buzz, investor attention remains fixated on the Federal Reserve. There’s a lingering hope, albeit slightly tempered, that rate cuts will occur this year. However, the acceleration in profit growth for the remaining 493 companies doesn’t hinge on rates. In fact, the Fed fixation is somewhat irrelevant amidst a backdrop of a strengthening economy. While long-term interest rates do influence valuations, the Fed is responsible for setting short-term rates. Stock appreciation driven by earnings growth, rather than multiple expansion, is much more sustainable.
If inflation remains sticky, delaying rate cuts by the Fed, equities will likely benefit. Corporate earnings are not adjusted for inflation, and thus modest inflation serves as a tailwind for profit growth, and ultimately stock price appreciation. With GDP forecasts creeping higher, the outlook for earnings appears increasingly promising. This contrasts with the scenarios being contemplated merely months ago, where slowing inflation and subdued economic growth would enable the Fed to cut rates, potentially boosting equity valuations. Durable earnings growth is the most preferred outcome.
Earnings season kicked off with JP Morgan’s update Friday, where CEO Jamie Dimon reiterated the cautious outlook he’s maintained for over two years. Concerns about geopolitical conflict, inflationary pressures, and quantitative tightening were once again highlighted. Shares traded down slightly as the banking sector transitions from a phase of overearning to a more normalized state.
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Of particularly note was the 7% decline in deposits within the Consumer & Community banking segment, which consequently pressured the banks net interest income. This decline, while anticipated, reflects broader trends seen across the industry. Wells Fargo noted a similar pattern. Despite these challenges, the overall health of large cap banks remains sound. However, they are navigating a period of subdued growth as the environment continues to normalize.
Separately, Dimon emphasized the significance of artificial intelligence (AI) in his annual letter. Dimon expressed conviction that AI’s impact could be as transformative as technological breakthroughs such as the printing press, the steam engine, electricity, computing, and the internet. With over 400 use cases for AI across various functions like fraud detection, risk assessment, and marketing, JP Morgan’s commitment to AI is evident. The establishment of a Chief Data & Analytics Officer position further underscores the firm’s serious approach to leveraging AI’s potential. This highlights the widespread and profound impact AI is poised to deliver, not just for the tech giants but all industries and society as a whole.
As we delve into this earnings season, our attention will be focused on enhancements in efficiency, given a majority of the growth in earnings this year is expected to stem from margin expansion. In that vein, we will also be listening for additional concrete examples of artificial intelligence delivering tangible results for companies.
As always, your dedicated Carson research team will remain vigilant and keep you informed with the latest updates and timely insights as they unfold.
For more content by Jake Bleicher, Portfolio Manager click here.
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