Markets – Earnings Breadth

We have been writing about our expectations that rate cuts from the FOMC would be pushed out as inflation stays higher than expected, growth avoids recessionary levels, and labor market activity moderates to pre-pandemic averages. Focusing on the labor component of that setup, our view was that the corporate earnings backdrop likely would not weaken enough to warrant mass layoffs and payroll growth would move closer to 2015-2019 levels. With the earnings season underway, we will start to provide updates on what we are seeing across industries.

So far for 3Q24, S&P 500 earnings growth on a y/y basis is at 2.1%, below 10.3% from the last quarter and lower than the 5.0% from the same quarter last year. However, most of the available data has come from the Financials sector, which faced tough y/y comparisons. The Financial Select Sector SPDR Fund (XLF), which is comprised of large cap Financials companies, is at 7.3% y/y earnings growth, but the comparison set eases from 16.2% to 6.0% next quarter. Looking at regional banks with smaller market caps, the y/y growth rate has accelerated to 8.3% from -15.3% last quarter. This is in line with our expectations for the breadth of earnings to improve as those smaller companies started to move against increasingly easier y/y comparisons. On that front, the Russell 2000 inched into positive territory coming in at 6.2% y/y thus far, an acceleration from -15.3% last quarter. The takeaway here is that earnings growth remains in positive territory and the breadth of companies reporting y/y growth has improved.

Source: Bloomberg

As more industries begin to report earnings, we will continue to monitor the breadth for a gauge on corporate sector health and what that could mean for the labor market moving forward.

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.