10 learnings from this earnings season

The Q2 season has brought a mix of both positive and negative surprises, leading to increased market volatility in recent weeks. In a note to clients published Wednesday, analysts at Societe Generale highlighted 10 learnings from the ongoing reporting season.

1) ‘Strong on EPS Beats, Weak on Sales:’ In Q2, 78% of companies beat on earnings per share (EPS), well above average levels, while only 58% exceeded sales expectations, the lowest in five years.

“The relative ‘shock’ is in sales, the relative surprise is in ‘profit margins’,” analysts noted.

2) ‘Profit Margins Are the Story:’ profit margins continue their uptrend. Tech sector profits have been improving for over a year, reaching new highs, while non-tech profits have also increased in the past two quarters. Margins typically lead capital expenditure (capex) growth by 4-5 quarters, with tech currently driving capex acceleration, the bank said.

3) ‘Beats Rewarded More than Misses Punished:’ On average, stocks that surpassed consensus estimates outperformed by 2.8%, while those that missed underperformed by 1.3%.

4) ‘Sector Beats:’ Sector-wise, Health Care, Materials, and Financials led the pack with the highest percentage of beats, while Staples, Energy, and Consumer Discretionary lagged.

“Essentially, consumer cyclicals and defensives are both lagging,” analysts said.

5) ‘Style Beats:’ Quality and Growth styles had the most beats in Q2, with High-Risk styles showing the fewest at 68%.

6) ‘2Q24 Upgraded, 3Q24 Downgraded:’ According to Societe Generale, consensus EPS estimates for Q2 were up by 1.2%, while Q3 estimates dropped by the same percentage. The overall S&P 500 EPS is tracking towards $240 by year-end, close to the bank’s estimate of $243.

“The season has not moved the needle on expectations for the year,” analysts commented.

7) ‘EPS Momentum:’ Materials and Tech sectors experienced the strongest EPS momentum, contrasting with the poor performance of Energy and Staples.

8) ‘EPS Breadth:’ In the past four weeks, there have been EPS upgrades from eight stocks and downgrades from ten, aligning with long-term averages, analysts noted. Financials and Tech are leading in upgrades, while Materials and Energy sit at the bottom.

9) ‘Six Charts for the Next Six Months:’ SocGen highlighted two key themes for the following six months: profits supporting continued rotation towards broader market growth, and the impact of US elections on market trades. Notably, the Nasdaq-100 profit growth rate is expected to slow, while S&P 500 ex-Nasdaq-100 profit growth is picking up.

10) ‘SG Turning Point Signals Show Upside to the EPS Cycle:’ Lastly, SocGen said its SG Global Cycle indicator has been in an upturn phase for five quarters, with the SG US consumer composite consolidating in positive territory for the past five months.

“Cyclical data is net positive, while our trading cross-asset momentum signal (XMOMO) is flagging short-term risk,” the note states.

In conclusion, Societe Generale analysts suggest that the rising profit margins are a saving grace, bolstering the ongoing profit narrative and maintaining the S&P 500 in ‘buy-the-dip’ territory.

“Non-recessionary Fed rate cuts should not lead to a de-rating,” they wrote.

In addition, they identify cyclical opportunities beyond the technology sector, particularly in Industrials and Financials.