Q1 earnings lead optimistic Q2 outlook

“Wall Street estimates that S&P 500 companies’ aggregate first-quarter earnings will grow 7.1% versus a year ago, outpacing the 6.7% growth predicted at the start of the year, FactSet data show. Estimates have climbed as investors have seen nearly eight out of every 10 companies beat consensus earnings forecasts—with very few firms left to report this season.

“It’s common for corporate profits to surpass estimates, as analysts typically make conservative guesses. But this quarter has been unusually good: The percentage of companies reporting higher-than-expected earnings has exceeded even the long-term average rate of 74%, FactSet data through Friday shows.”

“While companies certainly have done well this earnings season, there’s a disconnect between those results and stock market gains. The S&P 500 has raced far too ahead of earnings expectations for this year, according to Rosenberg Research’s David Rosenberg. …

“Investors are now paying 21 times for each dollar of the S&P 500’s projected profits over the next year, compared with 17 times during October’s market low. The multiple surpasses historical averages going back 25 years.

“Investors’ willingness to buy in on the expensive valuation signals an expectation of even bigger gains in the future—even though the S&P 500 has already climbed 28% since an October low point.

“And that’s where the disconnect lies. Profit growth for the first quarter has only been about one-fourth of the market’s monstrous gain since October, while 2024 earnings estimates have seen minimal change.”

“One of the more notable divergences this week occurred earlier this week [w/o 5/27] when the S&P 500 was less than 0.3% from its 52-week high, but only 42% of the index’s components were above their 50-DMAs. Divergences of this magnitude come along very infrequently, and since 1990 there have been just seven other periods when the S&P 500 was within 1% of a 52-week high and less than half of its components were above their 50-DMAs.”

• “Earnings Scorecard: For Q1 2024 (with 98% of S&P 500 companies reporting actual results), 78% of S&P 500 companies have reported a positive EPS surprise and 61% of S&P 500 companies have reported a positive revenue surprise.
• “Earnings Growth: For Q1 2024, the blended (year-over-year) earnings growth rate for the S&P 500 is 5.9%. If 5.9% is the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q1 2022 (9.4%).
• “Earnings Revisions: On March 31, the estimated (year-over-year) earnings growth rate for the S&P 500 for Q1 2024 was 3.4%. Ten sectors are reporting (or have reported) higher earnings today (compared to March 31) due to positive EPS surprises.
• “Earnings Guidance: For Q2 2024, 64 S&P 500 companies have issued negative EPS guidance and 42 S&P 500 companies have issued positive EPS guidance.
• “Valuation: The forward 12-month P/E ratio for the S&P 500 is 20.3. This P/E ratio is above the 5-year average (19.2) and above the 10-year average (17.8).”

“The percentage of companies issuing negative EPS guidance for Q2 2024 is 60% (64 out of 106), which is above the 5-year average of 59% but below the 10-year average of 63%. … At this point in time, 269 companies in the index have issued EPS guidance for the current fiscal year (FY 2024 or FY 2025). Of these 269 companies, 127 have issued negative EPS guidance and 142 have issued positive EPS guidance.”