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5 Key Takeaways from the Q1Earnings Season

The earnings season for the first quarter of 2024 is winding down, and the results have left investors optimistic. With 89% of the roughly 1,300 public companies in the Morningstar US Market Index having reported their results, 73% have exceeded analyst expectations. This has set the index on track for earnings growth of 4% in the quarter, a significant improvement from last year's 0.7% growth during the same period.


5 Key Takeaways from the Q1 2024 Earnings Season

Key Takeaways:

  1. Strong Corporate Earnings: The first quarter of 2024 saw 73% of companies in the Morningstar US Market Index exceed analyst expectations, driving a 9.4% increase in stocks for the year.

  2. Big Tech's AI Investments: Companies like Alphabet, Microsoft, Amazon, and Meta Platforms significantly increased their AI spending, expected to boost other market areas.

  3. Consumer Resilience: Reports indicate that consumers remain healthy, employed, and willing to spend, contributing to positive economic sentiment despite inflation concerns.

  4. Positive Future Guidance: Unusually strong guidance from companies has led to upward revisions in earnings estimates for the next quarter, boosting investor confidence.


The positive outcomes have lifted stocks by 9.4% for the year, driven by the enduring strength of corporate balance sheets. “Corporate America has really recovered from the earnings recession at the end of 2022,” says Josh Jamner, investment strategy analyst at ClearBridge Investments, noting that fears of margin contraction haven’t materialized. Additionally, company guidance for the upcoming quarter and the rest of the year has been unusually strong, suggesting a supportive environment for a continued bull market.


Big Tech’s AI Spending Spree Gains Steam

Artificial intelligence continues to dominate market trends, with first-quarter results showing substantial investments in this technology. Alphabet, for example, reported $12 billion in AI spending, a more than 90% increase from the previous year. Bank of America analysts highlighted that major tech firms like Microsoft, Amazon, Alphabet, and Meta Platforms are expected to spend $193 billion on capital expenditures in 2024, up 31% annually. This surge in spending is anticipated to boost other market areas, including semiconductor, power, and utility companies.


Earnings Growth Could Broaden Beyond Big Tech

Concerns about an overly concentrated market have been prevalent for over 18 months, driven by gains from the market’s largest players. However, this earnings season indicates that growth may start to broaden beyond Big Tech. David Lefkowitz, head of US equities at UBS Global Wealth Management, notes, “We’re getting in aggregate a little bit of profit growth from companies outside of the Magnificent Seven.” This potential rotation could signal a more diversified earnings growth landscape in the latter half of the year.


Wide Performance Gaps Persist Across Sectors

Despite the overall positive earnings, significant performance disparities between sectors remain, a lingering effect of pandemic-era distortions. Some sectors, like consumer defensive stocks, saw earnings growth of 2.5%, while others, such as healthcare, experienced over a 50% contraction. These wide gaps reflect the uneven recovery and ongoing adjustments in the market. Analysts expect these discrepancies to start evening out as the market continues to stabilize post-pandemic.


Consumers Remain Healthy

Reports from retailers, restaurants, and banks indicate that consumers remain healthy, employed, and willing to spend. This resilience persists despite concerns about dwindling pandemic savings and inflation impacts. JPMorgan CEO Jamie Dimon highlighted that low unemployment, rising home prices, and stock market gains contribute to strong consumer sentiment. Although there are signs of cautious spending, particularly among lower-income consumers, the overall consumer market remains robust.


Positive Guidance Buoys Confidence

Earnings reports not only provide insights into past performance but also offer guidance on future prospects. This quarter, company guidance has been unusually strong, leading to upward revisions in earnings estimates for the next quarter. For instance, analysts' expectations for S&P 500 earnings growth in the second quarter have increased from 9.6% to 10%. This positive guidance suggests that companies are confident about their future performance, which, in turn, boosts investor confidence.


Conclusion

The Q1 2024 earnings season has painted an optimistic picture for investors. Strong profits, robust consumer health, and positive company guidance have all contributed to a bullish market outlook. As the market continues to recover and grow, investors are looking forward to sustained momentum and broader earnings growth beyond the tech sector. The resilience of corporate America and the strength of consumer spending are key drivers that will likely support continued market gains in the months ahead.

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