The last few weeks, other than last Friday, have been dismal for the stock market. Perhaps its the political upheaval, or worries about stocks being too high, or something else altogether. It is important to remember, that though news impacts the prices of stocks every day, the main driver long term are company profits… higher profits should lead to higher stock prices.
JP Morgan, one of the Portfolio Strategists we utilize for client accounts, wrote the following about second quarter company profits in their Weekly Market Recap today…
While the recent political developments in Washington have grabbed headlines, it is important for investors not to lose sight of the fundamentals. The second quarter 2024 earnings season is underway, and by the end of last week, nearly half of the S&P 500’s market cap had already reported their earnings.
Analysts are tracking pro-forma earnings per share (EPS) of $59.46 for the second quarter. If realized, this would represent a 5.3% quarter over quarter and 9.1% year over year growth. Of this annual change, most of the EPS growth (around 7.8% out of 9.1%) is projected to be driven by margin expansion (from 11.8% a year ago to 12.7%), while sales are expected to contribute 1.8%. Net buybacks are expected to have a negative contribution of 0.6%.
8 out of 11 sectors are expected to contribute positively to EPS growth. Technology leads yet again, with most of the earnings growth coming from increased sales as aggressive AI-related capex spending still dominates margin expansion. On the flip side, EPS growth in financials, the second largest contributor, is projected to stem from margin expansion, primarily on the back of a rebound in investment banking and trading revenues. Of the remaining three sectors expected to drag down the EPS, energy is projected to have the most negative impact, as lower refining margins are expected to erode profitability of the sector.
Looking ahead, if the trend of above-average earnings beats and upward revisions witnessed in the first quarter continues, the second quarter earnings season could end with double-digit EPS growth for the quarter.
