Assessing Future Earnings in Q1: The Road Ahead

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By Ronald Tech

Anticipated Growth in 2024

The upcoming first quarter of 2024 shows promise, with a projected 2.4% increase in S&P 500 earnings from the same period last year, riding on a 3.5% surge in revenues. This follows a robust Q4 2023 performance, which boasted a 6.7% earnings spike on 3.8% higher revenues.

The Tech Sector’s Crucial Role

Continuing its trend from the past two quarters, the Tech sector emerges as a significant growth driver in Q1 2024. Without the Tech sector’s stellar earnings growth, the overall earnings for the rest of the index would have been tepid, potentially slipping into negative territory.

Insights from Previous Quarters

As we wrap up the 2023 Q4 earnings season, insights gleaned so far from the reports of 493 S&P 500 member companies reveal a 6.9% increase in total earnings from the previous year, coupled with 3.8% higher revenues. Impressively, 75.3% have outperformed EPS estimates, and 64.1% have beaten revenue predictions.

The ‘Magnificent 7’

In the spotlight for 2024 Q1 are the ‘Magnificent 7’ stocks, including Apple, Amazon, Alphabet, Microsoft, Meta, Nvidia, and Tesla, with anticipated earnings growth of 33.2% and a 13.4% revenue uptick. Excluding their contributions, the remaining index’s earnings for Q1 would experience a 3.3% drop from the previous year.

Measuring Sector Contributions

During the Q4 earnings season, the Tech sector notably bolstered aggregate growth. After a sluggish post-COVID period, the sector bounced back in Q3 of 2023, following six consecutive quarters of lackluster growth. Ex-Tech, the S&P 500’s earnings growth would have been lackluster.

Looking at the Macro Picture

With expectations of a moderated growth trajectory for the U.S. economy due to Federal Reserve tightening, there’s a possibility of downward adjustments to estimates. However, the modest 4.9% revenue growth projection appears conservative, especially considering last year’s nominal GDP growth rate exceeding 6%.

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Predicting Margins and Performance

Further examination shows that 2024 earnings growth hinges on margin expansion, with expected net margins for the index rising to 12.4% from 11.7% in the previous year. This outlook banks on a belief that inflationary pressures have eased, enabling net margins to revert to levels seen in 2022.