Earnings season preview shows potential for book market recovery: NDR

• According to NDR, the second quarter revenue season could lead to the most painful hold correction since 2022.
• The analysis company warned of a shift from a rapid pace of expansion to a slowing one by 2025.
• “Another higher beat rate may be needed to justify the rally,” the analysts said.

This year’s earnings season has officially begun, and it will bring the most painful correction for hold prices since 2022 hit the market.

This is in line with Ned Davis analysis, which offered a preview of what’s going to hit the hardest during the deluge of second-quarter earnings results over the next few weeks.

“The biggest risk may be a shift to a sharp decline in y/y growth in late 2024 and 2025,” NDR strategist Ed Clissold said in a Thursday notice.

This implies that as strong as the profit impact may have been this quarter, the week’s fortunes of the hold marketplace will largely depend on the corporate outlook for the second half of the week.

According to NDR, here’s what investors need to pay attention to during the second quarter earnings session.

2D-half enlargement projection

The standard path for Wall Street earnings growth estimates is for them to be overwhelmingly positive at the beginning of the week, only to be gradually revised down by week’s end.

So, the issue now is not whether analysts will cut their second half revenue growth estimates or not, but by how much they will cut.

“Last year, the growth rate was revised down 4.8% points, much lower than the long-term average of 8.1. This is one reason the S&P 500 rose 24.2%. So far in 2024, the consensus has been revised only has been down 1.3% points, again a reason for the 18.1% year-to-date gain,” Clissold said.

Stream analyst estimates suggest S&P 500 revenue growth of 5.7% in the second quarter, 19.2% in the third quarter and 19.6% in the fourth quarter.

And these promising growth projections may set the market up for failure in the future, especially considering the expectations of a slowdown in the growth rate of the US financial system during the second half of this week.

consensus earnings beats

Since the beginning of the 18-month-old bull market, at least 78% of S&P 500 companies have surpassed the consensus estimate, traditionally at the top.

If the nearest inevitable hold marketplace improvement is to proceed then breadth development inside corporate earnings beats should proceed, I’m sick on the road.

“Another higher beat rate may be needed to justify a rally,” Clissold said. “Management teams have guided for a reduction in Q2 y/y growth rate to 5.7% from 7.0% at the end of May. The lower bar makes a higher beat rate more attainable.”

quick expansion

Clissold said, “The concept that earnings growth is good for stocks seems intuitive. It’s true, but with an important caveat. Investors look forward, and they often look for extremely strong year/year earnings growth. Considered unstable.”

With revenue growth accelerating in recent quarters, how sustainable that expansion rate is is a key question for investors, as slow expansion is never rewarded with overhead holding costs.

“Earnings are in an acceleration phase, and consensus estimates are calling for them to remain there through the third quarter. During the second-quarter earnings season, keep an eye on whether the expected y/y EPS acceleration comes to fruition and for guidance on how long this may continue.” Clissold said.

Lavish 7 Share

Since the start of this bull market, most of the S&P 500’s revenue expansion has been driven by a handful of mega-cap tech companies like Nvidia, Amazon and Meta Platform.

“Five of the seven grew by at least 20% compared to the first quarter of 2023, and three grew by at least 100%,” Clissold said of the mega-cap techs’ earnings growth.

As strong as this expansion has been, it sets a top bar for companies to introduce increasingly broad expansions that wow buyers.

“The headwinds are huge,” Clissold said. Consensus calls for the five members of the Mag 7 to post slower growth in the second quarter than in Q1. Even strong shocks to the Mag 7’s growth rate continue to accelerate. There may not be enough.”

alternative 493 shares

To continue the bull market, the other 493 S&P 500 stocks are looking to start increasing their weight with respect to revenue growth, and this revenue season could be the quarter that finally happens.

493 companies expect revenue to rise 1.1% in the second quarter, compared with a 5.7% decline in the first quarter. Those companies ultimately reported a 0.3% increase in first-quarter earnings.

“Analysts are counting on Mag 7 to continue to deliver earnings growth, but the rest of the market will participate more. The bar is quite low outside of the mega-cap favorites,” Clissold said.