Key takeaways

  • S&P 500 companies are on track for earnings growth of approximately 5% in 2024’s first quarter.

  • Communication Services, Utilities, Consumer Discretionary and Information Technology stocks registered the strongest earnings growth.

  • Analysts anticipate profit growth continuing throughout 2024.

Corporate earnings, which measure the profitability of publicly traded companies, started out 2024 on a positive note, although there was some divergence among sectors. When all first quarter financial reports are in (sometime in June), consensus analyst projections indicate S&P 500 earnings as a whole will grow 5% compared to the first quarter of 2023.1 It would mark the third consecutive quarter of year-over-year earnings growth after a modest slowdown in 2023’s first half.1

Corporate bottom lines benefited from the economy’s surprising strength. Earnings growth declined in 2023’s first two quarters amid speculation the economy might head into a recession. Many saw this outcome as an inevitable consequence of the Federal Reserve’s (Fed) drastic monetary policy actions. The Fed raised the federal funds target interest rate it controls 11 times over a 16-month period, a strategy to slow the economy and cool what had been a hot inflation environment. However, fueled by strong consumer spending, the economy actually grew faster in 2023 than in 2022.2 After a slow 2023 start, corporate earnings gained momentum in the year’s final two quarters.

On average, first quarter 2024 earnings results were solid. Four sectors — Communication Services, Utilities, Consumer Discretionary and Information Technology — generated the strongest earnings growth for the quarter.1 While earnings for corporate America as a whole moved in a positive direction, not all companies prospered. “Selected companies came up short on earnings, but mostly having to do with specific issues in their marketplace or with the companies themselves,” says Rob Haworth, senior investment strategy director at U.S. Bank. “In general, the consumer’s ability to spend remains a constant that benefits most corporations.”

While investors continue to closely monitor factors like economic data and Fed monetary policy, Haworth notes that over the long term, no factor may have more impact on the performance of individual stocks than company earnings. Earnings represent a corporation’s net profits and provide a gauge of the financial health of a company and a stock’s potential performance.”


Maintaining strong financial performance amid economic headwinds

The U.S. economy expanded at a 1.6% annualized rate as measured by gross domestic product (GDP) in 2024’s first qurater.2 The GDP reading was slightly below the market’s expectations, though the data did not raise any immediate concerns about the economy’s health. Strong consumer spending remains the key to continued economic growth.

“S&P 500 earnings are projected to come in above $240 per share in 2024 — about a 10% improvement from 2023,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.

Higher interest rates and slower economic growth tempered the pace of corporate earnings growth in 2022, a trend that continued until 2023’s third quarter. Analysts’ earnings outlook is generally favorable throughout 2024, with earnings projected to accelerate throughout the year.

Chart depicts actual and projected quarterly earning for S&P 500 companies Q1 2022 thru Q4 2024.
Source: FactSet, “Earnings Insight,” May 3, 2024.

Based on analysts’ estimates as of March 2024, “S&P 500 earnings are projected to come in above $240 per share in 2024 — about a 10% improvement from 2023,” says Haworth. Yet, he notes that some challenges remain given the economy's modest growth rate, persistent inflation and elevated interest rates. “The general expectation is that the rate of economic growth will moderate in 2024 from 2023’s 2.5% level,” says Haworth. “If the economy slows, current expectations for 2024’s earnings growth may be overly optimistic.”

Chart depicts actual and projected calendar year earning for S&P 500 companies from 2020 through 2024.
Source: FactSet, “Earnings Insight,” May 3, 2024.

However, Haworth also notes that if a recession is avoided, investors may conclude earnings expectations were too pessimistic, and favorable earnings surprises could result. Often when that occurs, the stock market reacts positively.


Role of earnings in stock valuation

The publicly traded companies represented as stock holdings in your portfolio deliver quarterly financial statements that include a wide range of information. This includes a breakdown of sales (revenue) and expenses, the two key factors that determine earnings.

Earnings information is important because it provides a glimpse into the company’s business success in recent months. In many cases, companies provide “guidance” regarding their future earnings and growth prospects. This guidance serves as a preview of what may come based on trends companies experience in their businesses. While corporations often provide earnings guidance, it’s not a requirement. According to FactSet, as of May 3, 2024, 41 S&P 500 companies provided “negative” second quarter 2024 earnings guidance, a signal to investors that a company’s quarterly earnings for the quarter may be less than initially expected. By contrast, 34 companies provided “positive” guidance, indicating they anticipate better-than-expected quarterly earnings results.1 “Very few companies are willing to provide guidance for all of 2024,” says Haworth. “They are more focused on what’s ahead in the coming quarter.”

Professional stock analysts often estimate, in advance, their own expectations for what companies will report each quarter. “Investors are very attuned to the forward-view of earnings, which reflects the stock market as a discounting mechanism,” says Haworth. In other words, stock prices are based less on a company’s past performance and more on expectations of future financial success. “Stock prices typically incorporate a consensus market belief about the future state of a company, including earnings, growth prospects, risks, pricing challenges and other factors,” says Haworth.


Factors in valuing a company’s stock

Earnings provide the basis of one of the major measures of a stock’s individual value. Investors often use a statistic known as the price-to-earnings (P/E) ratio to help assess how expensive a stock is relative to the rest of the market. In other words, it is the ratio of the current price of a stock compared to the company’s earnings. If a stock is trading at $30 per share and the company’s annual earnings are $2 per share, the P/E ratio is 15.

Haworth notes that P/E ratio is just one measure of a stock’s performance. “We look at a variety of valuation assessments, including sales growth and book value growth, which is essentially a way of estimating the liquidation value of a company.” Other factors would include a company’s cash flow and a stock’s dividend yield.

When trying to assess which of two stocks offer the best investment opportunity based on their P/E ratios, it’s not always an “apples-to-apples” comparison. “Determining fair value has a lot to do with the underlying growth rate of the industry in which the company competes,” says Haworth. In some cases, investors may be willing to bid up prices based not on current earnings, but on expectations of future profitability. “This tends to be the case, for example, with stocks that invest in new technology that may not have an immediate payoff but offer the potential of future strong earnings if they succeed,” says Haworth. “Other stocks may have lower P/E multiples, but those companies generate steadier earnings, so the payoff on the investment needs to happen in a more compressed timeframe.”

Other variables can be reflected in the earnings they report. “It’s worth reading beyond the headline numbers,” says Haworth. “Unique, one-time events may affect earnings, either positively or negatively.” For example, if a company’s earnings declined due to a one-time major expense, that shouldn’t necessarily reflect poorly on its outlook. Similarly, if a company reports a strong boost to earnings, for example, because it sold off one of its business units, that may not reliably indicate future strength.


How earnings are reflected in the broader stock market

As they do with individual stocks, analysts can place a P/E valuation on the broader market. As of April 30, 2024, the P/E ratio of the S&P 500 based on earnings in the prior 12 months was 24.79, while the P/E ratio based on projected earnings for the next 12 months is 20.11.3 Analysts may set different valuations on the market based on varied sets of projections.

With S&P 500 P/E ratios based on projected earnings exceeding 20 times earnings, Haworth says the market may, on the face of it, look expensive, “but we’re in a different state now. Interest rates are elevated and inflation has come down significantly, so higher market multiples (P/E valuations) may be justified.” Haworth notes that technology-related stocks make up more than one-third of the S&P 500’s valuation in today’s market. “These companies are generally expected to realize faster, long-term growth rates, so they are often valued at higher multiples than other types of stocks.” For example, at the end of April 2024, the P/E ratio for the S&P 500 Information Technology sector, based on projected earnings, was 26.73, compared to 20.11 for the broader S&P 500 Index. The P/E ratio, based on projected earnings, for technology stocks was closer to 30 prior to April’s market decline (Information Technology stocks lost 5.43% compared to a decline of 4.08% for the broader S&P 500).4


Preparing for the current environment

Haworth believes that earnings, while always an important consideration driving investor sentiment, may be overshadowed in the near term. “To this point, earnings for the broader market have mostly met investor expectations, so in the short term, the market has been more susceptible to fluctuation based on the Fed’s interest rate policy and economic data affecting the Fed’s position,” says Haworth. “Now we’re waiting to see what impact the direction of the economy will have on business and consumer spending and how that affects corporate profit margins going forward.” While positive stock market performance was mostly limited to technology, communication services and consumer discretionary stocks in 2023, Haworth says we’re beginning to see “broader participation in the market, both in terms of stock price performance and earnings results from individual companies that did not experience favorable stock price results in 2023.”

As you assess your investment options and how to best position your portfolio, it can be helpful to do so in the context of a financial plan. Talk with your wealth professional to review whether changes to your investment strategy may be warranted to better reflect your goals, risk appetite and time horizon.

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  1. FactSet Research Systems, Inc., “Earnings Insight,” May 3, 2024.

  2. Source: U.S. Bureau of Economic Analysis.

  3. Source: S&P Dow Jones Indices, S&P 500 Fact Sheet (USD), April 30, 2023.

  4. Source: S&P Dow Jones Indices, S&P 500 Fact Sheet (USD), April 30; and S&P 500 Info Tech Fact Sheet (USD), April 30, 2023.

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