May 8, 2024: A Strong Start to the Year in Corporate Earnings

High interest rates, global conflict, problems in commercial real estate—despite these ongoing concerns, the U.S. corporate juggernaut carries forward. Through Monday, over 85% of companies in the S&P 500 Index have reported their first-quarter earnings, with most of them (80%) posting higher-than-expected growth. Incorporating estimates for the remaining 15% of companies, aggregate earnings are on track to grow 6.5% over the same period one year ago, ahead of the pre-earnings-season expectation of 4% and reversing a 2.5% decline from the same quarter last year.

Has the first quarter’s positive news cleared the fog covering the outlook for the remainder of 2024? Not so fast. A closer look at first-quarter results reveals that the Technology and Communication Services sectors have provided the heavy lifting for the S&P 500. Excluding these sectors, earnings growth drops to 3%, indicating that investors may require more convincing before a broader stock-rally takes hold. In addition, above-average stock valuations imply that the market will demand more than earnings beats for meaningful post-earnings appreciation; investors require positive forward guidance to justify above-average stock prices.

Worries over the economy will persist. However, this better-than-expected earnings season should add credibility to the optimism that corporate executives and market watchers have expressed for 2024.

Weekly Market Update: May 8, 2024