At this stage of the third quarter earnings season, almost 60% of S&P 500* companies have reported actual results (as of this writing). So, it’s a good time to dive into the earnings and revenue data because there’s now a large enough dataset for meaningful analysis.
As for earnings, through last Wednesday, 76% of companies reported actual per-share earnings above estimates, which is about in line with the 10-year average of 75%, per FactSet. Furthermore, these companies are reporting earnings surprises above estimates at a rate of 7.1%, which is slightly higher than the 10-year average of 6.8%:
Moving to the third-quarter earnings growth rate, companies are reporting a 9.5% year-over-year earnings growth rate. What’s most telling is it was only 3.6% a week ago.
What changed? Technology companies started reporting.
Right now, most sectors are doing well. In total, eight of the 11 sectors are reporting year-over-year earnings growth. But the power of tech is immense. If this holds, we’re on track for the fifth consecutive quarter of year-over-year earnings growth for the S&P 500.
In terms of revenues, as of last Wednesday, 60% of S&P 500 companies reported actual revenues above estimates. That’s slightly below the 10-year average of 64%.
The revenue growth rate is 5.4%. If it stays positive, it would mark the 16th consecutive quarter of revenue growth for the index overall.
Additionally, just like with earnings, the 5.4% rate is an increase over the previous week’s revenue growth rate of 4.9%.
To recap, in one week tech caused a bump up in the revenue growth rate (4.9% to 5.4%) and a huge leap in the earnings growth rate (3.6% to 9.5%). This goes to show how powerfully profitable the tech industry is currently.
Looking forward, analysts now expect solid earnings growth in the quarters ahead:
- Q4 2024: 13.4%
- Q1 2025: 13.4%
- Q2 2025: 12.6%
Even more interestingly, for all of 2024, the consensus analyst expectation for the year-over-year earnings growth rate is 9.3%. But for 2025, they’re predicting growth of 15.2%.
One other data point coming out of earnings season we want to discuss is net profit. The quarterly blended net profit margin for the S&P 500 now sits at 12%, which is above the five-year average of 11.5%. If it stands, this will mark the second consecutive quarter the S&P 500 is reporting a net profit margin at or above 12%.
The profit strength is largely led by tech, which is sitting at a 24.7% net profit margin for the quarter:
Even better, analysts now believe net profit margins for the S&P 500 will be above 12% for the next three quarters:
- Q4 2024: 12.1%
- Q1 2025: 12.6%
- Q2 2025: 13.1%
Yes, things are volatile right now. But the long-term macro fundamental outlook looks quite good.
A Cautionary Pause
But what about that emotional, short-term volatility related to the election that we’ve been discussing (and experiencing) for the past few weeks? It’s time to put a bow on it so we can finally move on.
Last week we highlighted a potential short-term crack as the trusty Big Money Index (BMI) from MAPsignals dropped from overbought territory (the BMI is a 25-day moving average of netted buys and sells from “big money” investors):
Prior to this last occurrence, the average duration of an overbought market was 22 days, based on the previous 73 times it took place. However, this time the BMI was above the overbought threshold for just four days:
The quickness of this shortly overbought BMI may have been directly related to being so close to Election Day. But we need to watch the data over the next week or so to know more.
Remember, the BMI wasn't falling due to a seismic increase in unusually large selling, but more from a fall off from unusually large buying:
In our opinion, this could most likely be the result of a cautionary pause by “big money” investors in the days leading up to a historically close election up and down the ballot. In other words, if the BMI were plummeting along with a huge spike in selling, we'd be more concerned.
While there's still time for an election volatility surprise, seeing softness in the final week of October and the few days leading up to the election fits the historical playbook of the BMI. In fact, this year was set to buck the election trend until Oct. 22.
In the examples below, notice how the yellow lines fall before the election (the blue vertical lines). This year, it just happened later in the cycle:
Why does this data reinforce our confidence going into the end of the year?
Because things aren’t out of historical norms and the current dips aren’t due to extreme selling. Plus, positive upcoming seasonality is still on our side. Going back to 1990, November is by far the strongest month of the year for stocks, on average:
Notice, per the chart below, how November also produces a positive return 73.5% of the time:
The probabilities are on our side in terms of historical performance. Interest rates will continue to fall. We should also get clarity on the near-term path for rates following the election.
All in all, this reinforces our positive narrative for the equity markets going into the end of the year post election.
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*Past performance does not guarantee future results.
* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
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