What to Watch as Third Quarter 2024 Earnings Season Begins

At the end of the quarter, earnings growth was expected to slow to 4.4% year-on-year in the third quarter, from double-digit growth in the second quarter. Sales growth of 4.7% was forecast for the third quarter compared to the same period last year. Future earnings guidance will be key, with consensus fourth-quarter 2024 and full-year 2025 earnings expected to rise 14.8% and 15%, respectively.

Earnings season began last Friday as a handful of companies dominated by financial stocks reported above-average results. Forty-four S&P 500 companies are expected to report earnings this week, with banks being a big focus, but many industries are represented. Reporting banks include Bank of America (BAC), Citigroup (C), Goldman Sachs (GS) and PNC Financial (PNC). There are a few other companies on the calendar like Johnson & Johnson (JNJ), CSX (CSX), Netflix (NFLX), Procter & Gamble (PG), and Progressive (PGR).

JPMorgan Chase (JPM) and Wells Fargo (WFC) reported better-than-expected earnings last Friday, getting the banks’ reporting season off to a good start. According to FactSet, the blended earnings growth rate for the financial sector rose to 1.6% from -0.7% year-over-year due to better earnings from JPMorgan and Wells Fargo. The pace of credit growth in the banking sector has been slow, which is likely to weigh on profit growth. However, investment banking and asset management revenues continue to benefit from strong markets, helping money center banks’ revenues relative to smaller banks.

The technology sector is expected to see the strongest earnings growth at 15.5% year-on-year. NVIDIA
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(NVDA) should be the largest contributor to the sector’s profits. NVIDIA’s profits are expected to rise 84% year over year due to strong demand for artificial intelligence semiconductors. According to FactSet, the sector’s earnings growth would be 7.5% without NVIDIA’s boost.

After some weak overall growth numbers for healthcare, largely due to acquisition-related write-downs, the sector is expected to show some profitability this quarter with year-over-year growth of 11.2%. According to FactSet, Pfizer (PFE), Eli Lilly (LLY) and Moderna (MRNA) are likely to be the main drivers of the profit increase.

The communications services sector rounds out the top three in forecast year-on-year profit growth at 10.5%. Unsurprisingly, Meta Platforms (META) and Alphabet (GOOGL) are expected to account for most of the growth.

Energy sector earnings are expected to be worst in the third quarter, falling 19.1% year-on-year. Natural gas and oil prices fell, leading to an expected decline in energy industry revenue.

Two of Berkshire Hathaway’s (BRKA, BRKB) top 10 publicly traded stock holdings are Occidental Petroleum (OXY) and Chevron (CVX). Berkshire has acquired a nearly 28% stake in Occidental. A previous article explained why Warren Buffett’s Berkshire Hathaway prefers Occidental Petroleum.

Sales growth is typically closely related to nominal GDP growth and combines post-inflation economic growth (real GDP) with inflation. Estimated nominal economic growth of 5% year-over-year supports the consensus estimate of 4.7% year-over-year revenue growth for the S&P 500, with some upside potential.

Despite a tougher start to the year, the pace of inflation growth has seen an overall downward trend, which should help earnings this quarter.

The difference between producer input cost price growth (PPI) and consumer price increases (CPI) suggests that profit margins may remain stable or increase this quarter. Revenue growth driven by the quarter’s economy and supportive margins leads to positive year-over-year earnings growth expectations.

The slightly weaker US dollar could have a positive impact on multinational companies’ profit growth this quarter. Since about 40% of S&P 500 companies’ revenue comes from international sources, the dollar can affect the profits of companies that sell their products internationally.

After the robust monthly jobs report, markets reassessed the pace of expected Federal Reserve interest rate cuts. Fed funds futures now indicate a slightly less than 100% chance of a 25 basis point (0.25%) rate cut in November and December. September retail sales on Thursday are the next key indicator of the strength of the U.S. consumer and economy.

The more economically sensitive cyclical stocks continued to outperform the less sensitive defensive stocks, suggesting that stocks are pricing in a higher probability that the U.S. avoids an economic recession. The relative performance of cyclicals compared to defensives is approaching the last one-year high reached in mid-July 2024.

The third quarter’s year-over-year mid-single-digit earnings growth represents a seemingly low hurdle for this earnings season. Earnings growth should be achievable, supported by sales increases fueled by solid economic growth. With fears of an easing recession reflected in stock prices and faster earnings growth expected in the fourth quarter and 2025, management’s future earnings forecasts are likely to receive more attention than third quarter earnings growth.