Banks Lead the Charge as Q2 2024 Earnings Season Begins

As the earnings season begins, anticipation is high for the second quarter (Q2) of 2024, with major US banks set to kick off the reporting period. This quarter is expected to be a significant test for the markets, particularly given the high valuations and optimistic earnings projections that have characterized recent market behavior.

Key Takeaways

Optimistic Projections: Analysts expect an 8.8% year-on-year earnings growth for S&P 500 companies, the highest since Q1 2022.
Focus on Major Banks: JPMorgan Chase, Wells Fargo, and Citigroup lead the earnings reports, providing early indicators for the market.
Sector Highlights: Communication Services and Health Care sectors are expected to drive earnings growth, while the Materials sector may face declines.

High Expectations for S&P 500 Earnings Growth

Analysts at US financial data group FactSet estimate a year-on-year earnings growth rate of 8.8% for S&P 500 companies. This would mark the highest year-over-year earnings growth rate reported by the index since Q1 2022, when it was 9.4%. The forecasted earnings growth for Q2 2024 is an optimistic signal for investors, suggesting a continued recovery trend for the US economy.

According to LSEG estimates, S&P 500 earnings are projected to increase by 10.6% on an annual basis. This robust growth is expected to be driven primarily by the Communication Services and Health Care sectors, which are anticipated to report earnings growth of 21.7% and 20.2%, respectively.

Major Banks Set to Report as Earnings Season Begins

The earnings parade unofficially starts on July 12 with major US banks such as JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C) leading the way. These financial giants' performance will provide early indicators of the broader market health and investor sentiment.

Tech and Health Care Sectors in Focus

Investors are particularly focused on the performance of big tech companies, which have been instrumental in the ongoing market rally. The Health Care sector is also under scrutiny, expected to show significant earnings growth. Any signs of weakness in these sectors could have outsized impacts on market sentiment, given their substantial influence on the S&P 500.

Valuations and Risks

Despite the positive projections, there are asymmetric risks due to inflated valuations. The S&P 500 is currently trading at 21.2 times what analysts project earnings to be over the next twelve months. Such high multiples have typically been seen only during the dot-com bubble and the pandemic years. The current high expectations mean that there is ample downside potential if companies fail to meet earnings projections.

Revenue Growth Projections

The S&P 500 is expected to report a 4.6% year-over-year revenue growth for Q2 2024. This would mark the 15th consecutive quarter of revenue growth, with the Information Technology and Energy sectors leading the charge. However, the Materials sector is projected to see a decline, highlighting some areas of weakness in the market.

Negative EPS Guidance

Notably, 60% of S&P 500 companies have issued negative earnings per share (EPS) guidance for Q2 2024, which is above the 5-year average but below the 10-year average. This trend will be crucial to monitor as more companies report their results and provide insights into their future performance expectations.

Future Projections and Market Sentiment

Looking ahead, analysts are forecasting earnings growth rates of 8.2% for Q3 2024 and 17.6% for Q4 2024. For the full year, an 11.3% growth is expected, with a further 14.4% growth projected for 2025. These projections could be adjusted based on the outcomes of the Q2 earnings reports.

Conclusion

As the Q2 2024 earnings season begins, all eyes will be on the major US banks and the tech and health care sectors. With high valuations and optimistic projections, the market is poised for a critical test. Investors will be closely watching for any signs of weakness or strength that could signal the direction of the market in the coming months. The next few weeks will be pivotal in determining whether the current market rally can sustain itself or if a correction is on the horizon. Investors should stay tuned for updates as the earnings season progresses.