Earnings season near its end, and consumer-led sectors again drove large cap earnings
With 95% of S&P 500 firms reporting, Q4 earnings season is just about over.
As we suspected, it turned out a lot better for large caps than analysts initially projected. Rather than contracting, Q4 earnings have grown at +3.9% YoY (chart below, orange bars). Three-quarters of S&P 500 firms ended up beating earnings projections (near the 5-year average).
Small cap earnings still in recession
In contrast, earnings in smaller companies have not recovered so quickly. S&P 400 mid-caps are set to exit their earnings recession in Q4 after four straight quarters of negative earnings growth (blue bars). But the results by sector were pretty mixed, with 6 of 11 sectors seeing negative growth.
For S&P 600 small caps, their earnings recession is set to continue for the sixth straight quarter in Q4 (green bars) – and analysts project it’ll continue through Q2 2024.
For small caps, 7 of 11 sectors saw negative earnings in Q4 – only Utilities (+38% YoY) was strongly positive. A big reason for the ongoing weakness in small caps earnings is that they have a larger share of floating rate debt than large caps, meaning the increase in the fed funds rate over the last couple years has put more pressure on their margins.
Returns reflect this earnings difference
What we’ve seen from earnings pretty much mirrors what we’ve seen for price returns this year too (chart below).
Large caps have had the strongest earnings and gains YTD (+6%), followed by mid-caps (+3%). And small caps, with their ongoing earnings recession, have seen their prices fall (-1%).
This makes sense. As we’ve discussed in the past, earnings are the biggest driver of prices in the long run.
Small and mid-cap earnings projected to pick up in second half of year
However analysts project that earnings will recover significantly for smaller stocks in the second half of 2024.
That could help mid-caps, and especially small caps, outperform as we get closer to the end of the year. Especially if we start to see rates falling.
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