News & Insights

S&P 500 Earnings Update

With the third-quarter earnings season now largely concluded for the S&P 500, 75% of reporting companies beat analyst expectations, in line with the 10-year average. Earnings for the quarter are on track to rise a modest 5.8% year-over-year, retreating from last quarter’s extraordinary 11% year-over-year increase.

Companies are growing via price and volume, not through financial engineering and cost cutting. Profit margins remain strong at 12%, supported by 5.6% revenue growth. Although that’s below the long-term average, it still indicates a healthy consumer. The Magnificent Seven continue to drive earnings, with the rest of the field showing flat profits for the period. Market volatility has been high, as investors bestow greater rewards for companies that beat on earnings, while greatly punishing those that fall short.

Analysts have quite the optimistic outlook for earnings, with forecasts topping 12% year-over-year for the next three quarters, totaling 15% for the 2025 calendar year. Earnings are also expected to broaden out in the fourth quarter and beyond, providing the fuel to extend the current bull market, which by historic standards is only middle-aged.

The retail sector is showing consumer spending continues to grow at a solid pace. Black Friday and Cyber Monday saw strong sales increases compared to last year. Consumer and small-business sentiment rebounded quickly following the election and can be expected to continue to rise as conditions for capital investment and employment improve with the extension of the 2016 tax cuts and regulatory relief.

Source: Factset

Source: Bloomberg

Second Revision to GDP Growth, Other Metrics Point to Economic Health

The Commerce Department’s first revision of third quarter GDP reports real U.S. economic growth at a healthy rate of 2.8%, down from 3.0% in the second quarter. Consumer spending surged 3.5% to post the strongest growth rate in six quarters. There was also a high demand for imports, emphasizing consumers’ economic strength. Inflation continues to moderate, with core PCE falling from 2.8% to 2.1% in the third quarter. The headline number, which includes food and energy, came in well below the Federal Reserve’s target at 1.5%.

With the election outcome pointing toward lowered regulatory burdens and improved capital treatment, we expect increased business investment. This should raise the level of potential GDP (a measure of sustainable output), which is running below nominal GDP today. A rise would reduce the risk of what might otherwise kickstart inflation again. While business investment recently posted its weakest number in seven quarters, structures investment has been strong, portending new capital spending. The tepidness may also have been related to the election, with many businesses in wait-and-see mode regarding capital expenditures. We can expect a spending surge into 2025 because companies historically ramp up their capital expenditures over the six months following an election. A stable labor market and contained inflation, along with healthy growth in income, productivity gains, and personal savings, suggests that solid consumer spending will continue to buoy economic growth.

Contributions to Percent Change in Real GDP, Third Quarter 2024

Source: U.S. Bureau of Economic Analysis

Real Personal Consumption Expenditures

Source: Bloomberg

Methodology Changes Have Weighed on Consumer Sentiment

Consumer sentiment metrics are picking up again after a sharp decline earlier this year. Sentiment remains below average, which suggests general dissatisfaction with the economy, but the increase reflects growing optimism. This shift is being driven by lower interest rates, a rising stock market and falling inflation, especially gas prices. As consumers digest the election results, sentiment for “current conditions” saw one of its biggest increases on record, up 22% from the previous month, with republicans and independents contributing to the rise. One-year inflation expectations jumped 0.3% for the same period, with consumer plans for buying big ticket items bouncing off historical lows despite continued inflation.

The consumer sentiment index may be painting a more negative picture than reality because of an April 2024 change in the way the University of Michigan conducts its surveys; rather than being interviewed on the phone, participants now enter their opinions online. In the past, Pew Research has found that survey respondents espouse more negative views online versus over the phone. The demographic being surveyed has also changed, with a much higher percentage of respondents being older individuals, which have historically conveyed more negative sentiment. This led Oxford Economics to produce an adjusted consumer sentiment index, showing that the results would be 8.9 points higher without the change in methodology. While headline sentiment continues to be glum, the underlying improvement portends a better-than-expected outlook for consumer spending.

University of Michigan Survey Methodology Lowered Sentiment

Source: Oxford Economics

University of Michigan Buying Conditions

Source: Bloomberg

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