The nascent stages of the Q4 2024 earnings season witnessed a positive start, driven primarily by robust performance from the financial sector. With 20 S&P 500 companies having reported, a significant 79% surpassed earnings expectations, setting a positive tone for the weeks to come. Large banks dominated the initial reports, providing a strong underpinning to the overall market performance. The week ahead promises a more comprehensive view of corporate earnings, with 40 S&P 500 companies scheduled to report, offering insights into a broader range of sectors. This includes key players like 3M, Netflix, Procter & Gamble, and Johnson & Johnson, alongside a continued focus on financial institutions. Market participants will be keenly observing these reports for indications of economic health and future growth prospects.
The positive earnings surprises from the banking sector, combined with encouraging inflation data, propelled stock markets higher and bond yields lower. The S&P 500 surged by 2.9% for the week, with the “Magnificent Seven” – comprising Microsoft, Meta, Amazon, Apple, Nvidia, Alphabet, and Tesla – also experiencing a 2% gain. Bank stocks, in particular, soared by an impressive 8.2% on the back of better-than-anticipated earnings. This performance suggests renewed investor confidence in the financial sector, potentially driven by factors such as improved capital markets activity and stable loan growth despite a modest overall lending environment. The easing of bond yields, primarily the 10-year U.S. Treasury yield which retreated to 4.6% from its recent peak of 4.8%, further contributed to the positive market sentiment. This decline in yields, primarily attributed to a decrease in real yields rather than inflation expectations, signals a potential easing of concerns about future interest rate hikes and borrowing costs.
The latest inflation data provided a sense of relief to investors concerned about rising prices. While headline consumer inflation (CPI) ticked up to 2.9% year-over-year, the underlying trend pointed towards moderation, particularly within the services sector. This deceleration in services inflation, combined with the anticipated slowdown in housing costs, suggests that overall inflation may continue to cool in the coming months. This positive development alleviated some pressure on the stock market, which had been facing headwinds from rising bond yields in previous weeks. The market’s positive reaction underscores the importance of inflation trends in shaping investor sentiment and driving market movements.
The financial sector played a pivotal role in driving the positive earnings growth witnessed in the early stages of the reporting season. Key players like JPMorgan Chase, Goldman Sachs, Morgan Stanley, and Bank of America significantly contributed to the sector’s earnings surge, which jumped from 39.3% to 47.5%. While loan growth remained subdued in the fourth quarter, a significant boost came from increased activity in capital markets, which bolstered earnings across the sector. This robust performance positions the financial sector as the anticipated leader in year-over-year earnings growth within the S&P 500, followed by the technology and communication services sectors. Conversely, the energy sector faces a projected decline of nearly 30% in year-over-year earnings, primarily due to the significant drop in oil prices compared to the previous year.
The “Magnificent Seven” continue to hold significant sway over the market’s direction, given their substantial market capitalization and influence on overall earnings growth. These seven companies are expected to deliver a combined earnings growth of 21.7% year-over-year, significantly outpacing the 9.7% projected for the remaining S&P 500 companies. Their earnings reports, scheduled for the week of January 27th, will be closely scrutinized by investors for insights into the health of the technology sector and the broader market. The anticipated strong performance of these companies is crucial for maintaining the overall positive momentum of the earnings season.
Several factors are expected to influence corporate earnings in the coming weeks. The year-over-year decline in oil prices is projected to negatively impact the earnings of energy companies and also weigh on the materials sector. The strengthening of the U.S. dollar during the fourth quarter may marginally dampen the growth of international earnings. Sales growth, closely linked to nominal GDP growth, has slightly outperformed expectations at 4.7%, driven by an estimated 5% year-over-year nominal GDP growth. The technology sector is expected to lead sales growth, while the energy sector is anticipated to experience a decline in year-over-year revenue due to lower oil prices. The blended earnings growth rate for the quarter currently stands at +12.5% year-over-year, surpassing the initial expectation of +11.9%, largely attributed to the robust performance of the financial sector. Market participants will be keenly observing forward earnings guidance for 2025, as double-digit profit growth expectations are already factored into consensus estimates.
