Citi: Productivity gains a tailwind to S&P 500 earnings

According to Citi analysts, productivity improvements are emerging as a significant contributor to the resilience of earnings.

As we approach the bulk of the Q2 earnings season, there are numerous macro and micro forces at play. However, Citi’s focus on productivity underscores its potential to sustain earnings growth despite broader economic uncertainties.

Citi’s analysts highlight that “productivity” is becoming a key component in their “earnings resilience” theme. While the impact of productivity gains will vary across companies, they view recent improvements as a sustainable tailwind for the S&P 500.

This perspective is supported by the bank’s use of a macro model, which incorporates five variables and blends Citi and consensus economic estimates to provide a sanity check on earnings forecasts.

For the near term, Citi believes that consensus earnings expectations for Q2 and Q3 are comfortably attainable. They estimate a potential upside of approximately $3 to the current bottom-up consensus EPS of $59 for Q2, driven by continued productivity gains.

This optimism extends into Q3, but Q4 presents a more significant challenge. The analysts describe Q4 consensus numbers as aggressive, suggesting that the setup may lead to a “beat-and-hold” scenario, where companies meet or slightly exceed estimates without prompting major upward revisions.

Citi maintains their full-year S&P 500 EPS estimate at $250. They note that achieving this target will likely require not only continued productivity gains but also stabilization in growth readings and a reduction in the cost versus price inflation differential headwinds.

While productivity gains are expected to persist into 2025, Citi cautions that achieving further gains may become more challenging. Nonetheless, they do not anticipate a sharp mean reversion in productivity levels.

Overall, the bank feels that productivity improvements are poised to play a crucial role in supporting S&P 500 earnings, offering a potential buffer against economic headwinds and contributing to earnings resiliency in the coming quarters.