July 17, 2024: The Economy Cools & Earnings Estimates Warm Up

The flurry of earnings reports is about to begin, and the primary question for investors this season is how the gap between weakening macroeconomic data will reconcile with optimistic, bottom-up earnings estimates. The economic lead into this earnings season is less than stellar, given slowing in services and in manufacturing, a cooling labor market, and slowing consumption. However, corporate earnings for companies in the S&P 500 easily cleared the Q1 bar, driving Q2 expectations higher to 8.6% growth.

Most of the S&P’s sectors are expected to deliver far less than 8.6% growth. Three sectors, in fact, are expected to show falling earnings over the same period last year. Once again, the so called Magnificent Seven stocks and their associated sectors appear burdened with carrying the earnings baton. However, the gloomy shadows cast on the remaining sectors could set the market up for a broadening rally should these sectors surpass expectations. Reasons to be optimistic include the Utilities sector seeing an AI-fueled boost in power demand. Oil prices have stayed favorable for the Energy sector. Increased prospects of rate cuts could alleviate concerns for real estate companies. And recent earnings revisions have been positive for cyclical sectors like Industrials.

Overall, expectations for the upcoming earnings season do not look daunting, keeping us optimistic for positive stock returns through year end.

Weekly Market Update: July 17, 2024