Handicapping Q1 Earnings: What to Expect

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

 

  • Total S&P 500 earnings for the first quarter of 2024 are expected to be up +2.1% from the same period last year on +3.4% higher revenues. This follows the +6.5% earnings growth on +3.8% higher revenues in 2023 Q4.

 

  • Estimates for 2024 Q1 have come down since the quarter began, though the magnitude of cuts compares favorably to what we experienced in the comparable period for the preceding quarter.

 

  • The Tech and Energy sectors are having the opposite effects on the Q1 earnings growth pace, with the Energy sector pulling it down and the Tech sector providing a boost.

 

  • For 2024 Q1, ‘Magnificent 7’ earnings are expected to increase +33.4% on +13.4% higher revenues. Excluding the Mag 7 contribution, 2024 Q1 earnings for the rest of the index would be down -3.6% from the year-earlier period (vs. +2.1% growth otherwise).

As we look ahead to the 2024 Q1 earnings season, whose early results have already started coming out, it is important to keep in mind where we have been in recent quarters and what is expected for the next few periods.

The chart below shows current Q1 earnings and revenue growth expectations in the context of what has been actually achieved over the preceding four quarters and what is currently expected from the following three periods.

Zacks Investment Research
Image Source: Zacks Investment Research

You can see in this chart that earnings growth turned positive in the 2023 Q3 after remaining modestly in negative territory for the three quarters before that period. Two notable developments helped push the aggregate growth picture into positive territory – the Tech sector resumed its traditional growth-driver status, and net margins turned positive.

Expectations for 2024 Q1 and beyond show that the Tech sector is expected to remain a core growth driver, and the margin outlook will continue to improve.

As noted in the chart above, 2024 Q1 earnings are expected to increase +2.1% from the same period last year on +3.4% higher revenues.

The chart below shows how estimates for 2024 Q1 have evolved in recent months.

Zacks Investment Research
Image Source: Zacks Investment Research

Please note that the magnitude of negative revisions to Q1 estimates compares favorably to what we had seen in the comparable period for 2023 Q4.

Since the start of Q1, estimates have come down for 10 of the 16 Zacks sectors. The sectors suffering the biggest estimate cuts include Energy, Basic Materials, Transportation, Autos, and Aerospace.

On the positive side, estimates have been raised for 6 of the 16 Zacks sectors since the quarter got underway, with the Retail, Tech, and Utilities sectors enjoying notable positive revisions.

The revisions trend noted here for 2024 Q1 also represents what’s happening to full-year 2024 estimates. While estimates in the aggregate are coming down, several major sectors, including the Tech sector, are still enjoying positive estimate revisions.

The chart below shows how estimates for full-year 2024 have evolved.

Zacks Investment Research
Image Source: Zacks Investment Research

The chart below shows how full-year earnings expectations for the Tech sector have evolved over this period.

Zacks Investment Research
Image Source: Zacks Investment Research

This favorable earnings outlook for the Tech sector should reassure us all of the fundamental underpinnings of the group’s stock-market momentum. One can quibble over the appropriate valuation level for an individual Tech stock, but we can say with a reasonable degree of confidence that the group’s stock market momentum should remain in place as long as the revisions trend remains favorable.

For the Tech sector as a whole, 2024 Q1 earnings are expected to be up +18.8% on +7.8% higher revenues. This would follow the sector’s +27.4% higher earnings in 2023 Q4 on +8.5% revenue growth.

Current-period estimates for Oracle ORCL, Adobe ADBE, and Jabil JBL have modestly moved lower since they reported results in recent days for their fiscal quarters ending in February, which we count as part of the March-quarter tally.

Oracle is expected to bring in $1.64 in EPS for the fiscal quarter ending in May, down from $1.65 per share a few weeks back. Estimates for Adobe and Jabil have similarly been cut modestly. The pressure on estimates for Oracle, Adobe, and Jabil notwithstanding, the overall revisions trend for Tech sector estimates remains positive.

Had it not been for the Tech sector’s growth, aggregate earnings for the remainder of the S&P 500 index would be modestly in negative territory.

Below, we show the overall earnings picture for the S&P 500 index on an annual basis.

Zacks Investment Research
Image Source: Zacks Investment Research

A big part of this year’s earnings growth is expected to come from margins reversing last year’s declines and starting to expand again. The expectation is that aggregate net margins this year get back to the 2022 level, with the Tech sector driving most of the gains.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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