US earnings season Q2 2024: Strong growth amid mixed signals

US companies rack up strong performance in Q2 earnings season

US earnings season for the second quarter (Q2) 2024 demonstrated robust overall performance. A significant 79% of S&P 500 companies reported positive earnings per share (EPS) surprises, surpassing the 5-year average of 77%. The blended earnings growth rate reached an impressive 11.3%, marking the highest growth rate since fourth quarter (Q4) 2021. Similarly, revenue growth for Q2 2024 stood at 5.3%, the highest since Q4 2022, indicating a strong financial performance across the board.

Sector performance – utilities do best while materials suffer

Sector-wise performance varied significantly. Utilities led the pack with a remarkable 21.0% earnings growth, closely followed by Information Technology at 20.3%. Other top-performing sectors included Financials, Health Care, and Consumer Discretionary. However, the Materials sector experienced the largest earnings decline at -8.4%. In terms of revenue growth, Information Technology outperformed other sectors with an 11.0% increase, while Energy followed with 8.1% growth.

Earnings surprises muted

Despite the overall positive performance, earnings surprises were somewhat muted. The average earnings surprise was 3.6%, falling below the 5-year average of 8.6%. The Utilities sector stood out with the largest positive earnings surprise at 9.5%, while the Communication Services sector reported the largest negative surprise at -12.0%. On the revenue front, 60% of companies reported revenue above estimates, which was below the 5-year average of 69%. The average revenue surprise was 0.7%, also falling short of the 5-year average of 2.0%. Health Care and Information Technology sectors showed the highest percentage of companies beating revenue estimates.

Outlook mixed, though growth to continue

Looking ahead, the guidance and outlook for future quarters present a mixed picture. For the third quarter (Q3) 2024, 54% of companies issuing EPS guidance provided negative outlooks, which is below the 5-year average of 59%. Analysts project 4.9% earnings growth for Q3 2024 and a more optimistic 15.4% for Q4 2024. For the full year 2024, expectations are set at 10.1% earnings growth and 5.1% revenue growth, suggesting continued optimism in the market.

S&P 500 valuation still elevated

Valuation metrics indicate that the market is pricing in future growth. The forward 12-month price-to-earnings (P/E) ratio for the S&P 500 stands at 20.6, which is above both the 5-year (19.4) and 10-year (18.0) averages. This elevated P/E ratio suggests that investors are willing to pay a premium for future earnings, reflecting confidence in continued growth prospects.

Market reactions to earnings reports were somewhat muted compared to historical averages. Companies reporting positive earnings surprises saw an average price increase of 0.9% in the surrounding days, slightly below the 5-year average of 1.0%. Conversely, those reporting negative surprises experienced an average price decrease of 4.4%, which was more severe than the 5-year average decline of 2.3%. This indicates that while the market rewarded positive surprises less than usual, it punished negative surprises more harshly.

While the Q2 2024 earnings season demonstrated strong overall growth, there were mixed signals in terms of surprises and future guidance. The market appears to be pricing in continued growth, as reflected in the above-average P/E ratio, but reactions to earnings reports suggest a degree of caution among investors.