S&P 493 Earnings Recession Is Over: Morning Brief

Here is the summary of today’s Morning Brief, which you can register to receive in your mailbox every morning accompanied by:

The S&P 500 index is up 17% year-to-date.

But as investors have heard time and again, that performance can largely be attributed to a handful of stocks that follow a common theme: the Magnificent Seven and AI. As of late June, for example, Nvidia (NVDA) alone accounted for more than a third of the S&P 500’s gains this year.

For the other 493 stocks in the benchmark index, earnings growth and shareholder returns have been more measured. In fact, as the Bank of America team pointed out in a note published Tuesday, these other members of the S&P 500 have been in an earnings recession since early last year.

According to data from BofA’s U.S. equity strategy team, S&P 493 earnings have not posted year-over-year growth since the fourth quarter of 2022.

After a 2% annual decline in the first quarter of 2023 and a 7% annual decline in the second quarter of last year, profit growth has been stable for this group in each of the last three quarters, the firm’s work shows.

The upcoming second-quarter earnings season, however, should mark the end of what has been a stealthy earnings recession for the vast majority of S&P 500 companies. For the 493 non-Mag 7 stocks, earnings growth is expected to reach 6%, 7% and 13% annually in the second, third and fourth quarters of 2024.

That growth is still expected to lag the index’s overall earnings growth, however, as the lion’s share of that earnings growth will come from the technology (XLK) and communication services (XLC) sectors, which are home to AI beneficiaries like Nvidia, Microsoft (MSFT), Meta (META), and Alphabet (GOOGL, GOOG). (Healthcare, in particular, is also expected to see double-digit earnings growth in each of the next three quarters, though BofA cautions that those results are due to one-time items disappearing from the books of Pfizer (PFE) and Merck (MRK).)

Nvidia CEO Jensen Huang delivers his keynote speech ahead of Computex 2024 in Taipei, Taiwan, on June 2, 2024. (SAM YEH/AFP via Getty Images) (SAM YEH via Getty Images)

Some on Wall Street are dismayed by the bifurcated performance between the haves (the AI ​​names) and the have-nots (everyone else) in the S&P 500. But we think these numbers help us understand how we got here and where we’re going.

At the start of 2024, one of the consensus views on Wall Street was that the market rally would broaden after a surge in 2023 defined by the AI ​​theme. So far, that hasn’t been a feature of this market. Fundamentals, i.e., earnings growth, help explain why.

In each of the last two quarters, the aforementioned technology sector saw earnings growth of 25% and 27%, respectively; for communications services, earnings growth was even more spectacular, at 53% and 43% during those periods.

It is therefore not surprising that these sectors – and the most influential components within them – are at the forefront…

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