Earnings Forecasts Clash with Economic Realities | Episode 182 | 10-22-24

In this episode of Markets with Megan, CIO Megan Horneman discusses the latest developments in the third-quarter earnings season for the S&P 500. With financials kicking off the reporting, Megan highlights key trends such as banks' mixed decisions on loan loss reserves and the implications for consumer debt—especially the rise in credit card usage amid soaring interest rates.

She breaks down earnings growth expectations, noting a projected 3% year-over-year increase, but stresses that the gains are heavily concentrated in the "Magnificent Seven" stocks. Without them, the overall growth is nearly flat. Megan also flags concerns about overly optimistic earnings forecasts for 2024-2025, potentially leading to further volatility as global economic forecasts are revised downward.

Understand how inflation and potential Federal Reserve rate cuts shape corporate strategies and market expectations. Whether you're a seasoned investor or just keeping tabs on the market, this episode provides actionable insights into what could shape the market's performance in the coming weeks. Tune in to stay ahead of these developments and what they mean for your investments.

Earnings season is starting to kick up here in the US. It is Tuesday, ctober 22nd, and third quarter earnings for the S&P 500 are starting to roll in. They started late last week with the financials and we got a good kickoff to earnings season with the financials. The main thing we look at financials is from a consumer perspective. What are they doing with their loan loss reserves? That means, are they sitting aside more money for the potential for losses on loans? And we got mixed results there. A couple of the major banks did not increase their loan loss reserves. Jp Morgan did, but they came out saying that this is primarily because they are increasing their credit card loan book, not because they think the consumer is in trouble. We would say that's not a great sign for the consumer that they're taking on more debt in order to fund their spending, especially with rates at over 20% on credit cards. So let's dig into some of the details of what we're looking for and what to expect for this earning season that'll go over the next several weeks.

First of all, we only have like less than 20% of the S&P 500 index companies that have reported thus far. We're looking at the potential for earnings growth of about 3% on a year-over-year basis. That's the current estimate. It is down lower from the expectation that we had when we began the third quarter and if that holds, it will be the lowest growth rate we've seen since the second quarter of 2023. However, it would be the fifth consecutive quarter of positive earnings growth, so that's a positive. But when you dig into the actual details and we look at the Magnificent Seven, who have really carried earnings for quite some time, the story is still the same in the third quarter. When you look at the Magnificent Seven, who have really carried earnings for quite some time, the story is still the same in the third quarter. When you look at the Magnificent Seven, they're expected to be among the top 10 contributors to overall earnings growth for the index. If you look, those companies are projected to report a year-over-year earnings growth of almost 20%.

So if you take those seven companies out of the earnings growth rate, you're actually looking at only, basically, earnings growth of 0.1% ona year-over-year basis for the S&P 500. So we're still looking at not only total return but also the earnings growth being driven so concentrated in these seven stocks. That's concerning to us. Earnings growth being driven so concentrated in these seven stocks that's concerning to us. On the other side, we are finally seeing some realistic expectations on earnings. I still think there's a way to go for these earnings to be revised lower.

What we've talked about a lot is that the expectation for this year but, more importantly, next year for earnings is unrealistic and equities are pricing in this perfection in earnings. Right now, we're looking at a 15% earnings growth rate between 2024 to 2025. It's lower than it was a few months ago, but a 15% earnings growth rate when we've seen economic forecasts downgraded even this morning, the IMF came out and downgraded their outlook for global growth. This just doesn't mesh well here. There's going to be some, in our opinion, some more downgrades to 2025 earnings growth, which will result in more volatility from an equity perspective.

Now we're also going to be looking specifically what companies are saying on the inflation front and also what are they thinking as far as the Federal Reserve rate cuts. Are they changing anything to their business because of the expectation for rate cuts? Are they still cautious because of the inflation picture? That's what we're going to be paying attention to. That's all we have today. We'll be back with some more economic data this week and any other market moving events that we have. If you like this podcast, please hit, subscribe, share with friends and colleagues. There's an alarm bell you can hit and if you want some of our historical podcasts, you can go to marketswithmeganf. Thank you.