More than 85% of the companies that make up the S&P 500 indexweighted by market capitalization, reported their results for the third quarter of 2024. This balance sheet season was rated by Schroders “as fair to good”, since although most companies exceeded analysts’ expectations in terms of earnings per share (EPS), sales failed to show the same performance.
For the international broker, this pattern is consistent during the last four balance sheet seasons, where the surprises were greater in terms of EPS than in sales. Some key data for the market this week are the publication of the minutes of the last meeting of the Federal Open Market Committee (FOMC, in English) this Tuesday, the revision of the estimate of the US Gross Domestic Product on Wednesday and the price index of the PCE that same day.
Regarding the performance of the S&P 500 index as a whole, weighted by market capitalization, the results show a similar trend, which translates into “a fair to good rating” for the season. This behavior suggests that, although EPS results exceeded historical expectations, sales failed to keep pace.
In terms of earnings per share growth, the S&P 500 has shown a positive trend in recent quarters. In fact, according to Schroders It is the fourth consecutive season in which earnings per share register a quarterly increase. In the two previous seasons, this growth was explained almost entirely by the increase in sales. However, in the third quarter of 2024, lAccelerated growth is due to both increased sales and improved profit margins..
“This suggests that companies are more efficient in generating income, not only increasing their sales, but also optimizing their profitability,” says the consulting firm.
S&P 500: how the dynamics continue
Looking ahead, the market maintains high growth expectations for the S&P 500’s earnings per share over the next 12 months. Profits are projected to increase by 19% (in real terms), much higher than the average historical growth of 14%.
However, “this expected growth is explained more by the improvement of margins (which is considered inorganic growth) than by an increase in sales (organic growth),” he says. Schroders. This type of growth, driven by improved operational efficiency, “is more vulnerable“to external factors than the growth generated by an expansion in sales.
For the broker, market sentiment this season appears to be more neutral than in previous quarters, with investors rewarding positive surprises and punishing negative ones. Despite the optimism in the market and high expectations for the future, the results tend to be close to analysts’ expectations, which contributes to maintaining valuation levels in the market, which in historical and relative terms remain high.
“This is one of the factors that generates some caution, since future growth expectations seem to be already reflected in current stock prices,” the document maintains.
When analyzing the ratings, Schroders concludes that Investors remain optimistic, and the current valuation level implies 3.0% compound annual growth in US gross domestic product (GDP) over the next 10 years. Although Artificial Intelligence is seen as a disruptive technology capable of generating a productive revolution, it is also true that a part of that revolution is already incorporated into prices. This reminds us of the dot-com bubble of the 1990s, when expectations about the potential of the internet did not prevent a massive correction in financial markets when the bubble burst.
The recommended strategy
Regarding the investment thesis, Schroders estimates that fixed income offers a better risk/return ratio than equities in the current context. Although equities had an outstanding performance in 2024, both in absolute and relative terms, “uncertainty about future economic policies, particularly former President Donald Trump’s economic plan, raises doubts,” the document notes.
Their approach appears to be aimed at promoting “reflation”, which could encourage economic growth and inflation, thus favoring equities over fixed income. However, concerns about high valuations and optimistic expectations that are already priced into stock pricess leads us to maintain a cautious stance regarding the current levels of the stock market.
Source: Ambito
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