A ‘robust’ earnings outlook is driving further optimism for stocks in 2024

A ‘robust’ earnings outlook is driving further optimism for stocks in 2024

The prospects for the most important driver of the stock market keeps improving.

S&P500 (^GSPC) profits rose 6% in the first quarter from a year ago, according to FactSet data. When excluding Bristol Myers-Squibb’s dismal profits (BMY), the results were even better, with profits growing by 10%, according to Bank of America.

This comes as earnings estimates for the coming quarters are also on the rise. The consensus now forecasts earnings growth of 11.4% in 2024, compared to an April 5 projection of 10.9%. In 2025, earnings growth estimates rose to 14.2% in 2025, compared to 11.6% growth seen that day.

On Tuesday, Jonathan Golub, UBS Investment Bank’s U.S. equity strategist, raised his year-end target for the S&P 500 from 5,400 to 5,600, citing “stronger earnings.”

“While earnings estimates for subsequent quarters typically decline over the course of earnings season, (second-quarter) estimates have also been quite robust,” Golub wrote. “A similar trend is also evident in the estimates for full year 2024. These trends all support further market upside.”

Profits are one of the many reasons why Wall Street strategists raised their S&P 500 year-end targets. Golub and others have noted that economic “tail risks” have declined, with consensus estimates of economic growth increasing throughout the year.

Binky Chadha, chief global strategist at Deutsche Bank, recently told Yahoo Finance that stronger-than-expected growth in the economy could help the S&P 500 reach 6,000 points by the end of the year. But for its current target of 5,500, much of the argument is based on earnings growth that is “accelerating and continuing to accelerate.”

“We believe the earnings cycle will have many lengths,” Chadha wrote in a research note, increasing his year-end target for the S&P 500 to 5,550 from 5,100 on May 17. “While not all of the growth may materialize this year, we see market confidence in a continued recovery that would deepen by the end of the year, supporting multiple stocks.

Chadha, like other strategists, was looking for a profit growth rotation start in the first quarter, with big tech growth starting to slow and other areas catching up. That didn’t really happen. A basket of stocks that Chadha follows, called “Mega-Cap Growth and Tech,” is up about 39% over the previous year, roughly flat compared to the 40% growth of a year over year observed in the previous quarter.

This is not a problem in itself, according to Chadha. He believes that the solid profit growth seen in this group, which includes “The Magnificent Seven” technology stocks, among some other big names like Netflix (NFLX), Visa (V) and Adobe (ADBE), is “extremely likely to slow down at some point.” And this will come as positive developments brew beneath the surface in other pockets of the market.

Profits for cyclical and defensive stocks rose 7.5% in the first quarter, which Chadha called “healthy.” Other strategists believe that a similar catch-up scenario should take place in terms of profit growth during the rest of the year.

Ohsung Kwon, Bank of America’s U.S. and Canadian equity strategist, highlighted in a recent research note that Nvidia generated 37% of the S&P 500’s earnings growth over the past 12 months. In the next 12 months, this is expected to be only 9%.

“We no longer think it’s just about Nvidia,” Kwon told Yahoo Finance. “Things are expanding…to electricity, raw materials, utilities, things like that.”

Strategists like Kwon say the most notable problem in the fundamental story of stocks has been cost cutting that has driven profit growth, not rising demand and exploding revenues. Kwon and Bank of America remain confident that will change later this year, as industrial companies have indicated they believe they have reached the trough of declining demand in their cycle.

“In the second half of the year, we’re going to start to see that demand pick up,” Kwon said. “And with that, we’re going to see operating leverage and better margins.”

Charles Schwab senior investment strategist Kevin Gordon noted that this will be a key trend for investors throughout the year. In the first quarter, companies that beat revenue estimates outperformed those that just barely beat earnings estimates.

For Gordon, it was a market that distinguished companies that only increased profits through cost reductions.

“The market tends to smell (cost reductions) and at some point say, OK, now we actually need to see real demand come back online,” Gordon told Yahoo Finance.

A ‘robust’ earnings outlook is driving further optimism for stocks in 2024

Traders work on the floor of the New York Stock Exchange (NYSE) on January 29, 2024, in New York. (Spencer Platt/Getty Images) (Spencer Platt via Getty Images)

Josh Schafer is a reporter for Yahoo Finance. Follow him on @_joshschafer.

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