The Strategist

Q4 2024 reporting season: the usual game

After four of the "Magnificent Seven" - Tesla, Microsoft, Meta Platforms and Apple - presented their quarterly figures last week, it is a good time for an initial assessment of the Q4 2024 reporting season. The preliminary conclusion is that the usual game is working again this quarter: after having been lowered, estimates are once again comfortably exceeded.

Date
Author
Chris Burger, CFA, Senior Equity Analyst, LGT Private Banking
Reading time
10 minutes

Q4-Berichtssaison
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Strongest earnings growth in three years

According to FactSet, 36% of S&P 500 companies have published their results so far. The current estimate of earnings growth - the combination of the actual results from companies that have reported and the estimated results from companies that have not yet reported - for the fourth quarter is 13.2%. This compares with 11.8% at the end of the quarter (31 December) and 14.7% at the beginning of the quarter (1 October) and is the highest quarterly growth rate in the last three years. The current expectation for sales growth in the same period is 5.0%. This forecast was revised downwards during the quarter, from 5.2% to 4.6%.

Market rewards surprises more than average

77% of companies beat earnings estimates (63% beat sales expectations), which is pretty much in line with the historical average. Overall, companies have beaten earnings estimates by 5.0%, which is slightly below the historical average. So far, however, the market has rewarded positive earnings surprises more than average and punished negative earnings surprises somewhat less than in recent years.

Positive momentum in financials and communications masks weakness in industrials sector

Seven of the eleven sectors are expected to post positive earnings growth in the fourth quarter, with five of them posting double-digit growth. However, four sectors are forecast to report a decline in earnings. Interestingly, the sectors with the highest earnings growth are also those with the strongest positive earnings surprises and vice versa. Thus, the positive surprises from companies in the financial sector (Goldman Sachs, Discover Financial Services, Travelers Companies and Morgan Stanley), which can benefit from a low comparative base, and from the communications sector (Meta Platforms) have offset the partially negative surprises from the industrial sector (Boeing, Lockheed Martin and GE Vernova). 

European companies with weaker growth, partly due to energy sector

In Europe, the reporting season is less advanced. However, the growth rates look somewhat less impressive, partly due to the high prior-year base in the energy sector. For the fourth quarter, the market expects sales growth of 1.7% (excluding the energy sector: +4.9%) and profit growth of 1.5% (excluding the energy sector: +5.3%) (source: LSEG I/B/E/S).

Very positive qualitative statements

Despite emerging uncertainties such as DeepSeek or Trump's new tariffs, companies were predominantly very positive at analyst conferences. Both Meta Platforms and Microsoft confirmed their plans to further increase their investments this year. An analysis of the conference calls shows that terms such as "optimistic", "better" or "stronger" versus "worse" or "weaker" have risen to their highest levels in three years. This means that the Bank of America Merrill Lynch Corporate Sentiment Indicator remains at a record high. The indicator is one quarter ahead of the earnings cycle and points to a sustained upward trend in the expected sales and earnings momentum.

Acceleration expected in the second half of the year

Despite companies’ verbal optimism, the number of companies that have issued a positive guidance - i.e. the midpoint of the forecast profit range is above the current consensus - is roughly balanced by the number of companies that have issued a negative guidance. However, this is within the normal range, especially as we assume that companies are acting conservatively given the ongoing macroeconomic and political uncertainties. According to FactSet, the market now expects earnings growth of 10.1% for the S&P 500 in the first quarter of 2025, with sales growth of 4.8%. It also expects a steady increase to 10.9% in the second quarter, 14.9% in the third quarter and 16.1% in the fourth quarter, for full-year earnings growth of 14.3%. In our view, this leaves plenty of room for companies and Wall Street to revise estimates downwards in the run-up to the next few quarters and then exceed them again.

We maintain our "Overweight" in European equities

In Europe, the market also expects the Stoxx Europe 600 to accelerate, albeit at a lower level (to 3.1% in the first, 9.5% in the second, 11.9% in the third and 9.3% in the fourth quarter). The European index (P/E: 14.0x) is also trading at a considerable discount to the S&P 500 (P/E: 21.9x). In addition, the ECB is likely to cut key interest rates faster and more sharply as inflation approaches the ECB’s target and economic growth lags behind. The highly export-oriented economy should also benefit from the weaker euro. We therefore continue to believe that European equities offer catch-up potential and maintain our "Overweight" position in European equities in the portfolio context.

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