Earnings Growth Turns Positive Across the Globe
Earnings Watch: All regions are in positive territory after Europe posted its first quarter of profit growth since the first quarter of 2023.
Key Takeaways
Utilities helped drive earnings growth in the U.S. and Europe due to the growing demand for energy to power AI, EVs and reshoring activity.
Though many consumers are delaying discretionary and big-ticket purchases, select discounters are benefiting as higher-income shoppers trade down.
Analysts expect earnings growth to expand beyond the largest U.S. companies, whereas slowing conditions could delay a full recovery in eurozone profits.
Global earnings growth was positive in the second quarter amid a stabilizing economic backdrop. Inflation remained above target, but a reading on global manufacturing showed that activity was picking up at the fastest pace since April 2022.1 On the other hand, the health of consumer demand remains a concern due to higher prices, weakening employment conditions and the depletion of excess savings.
The reporting period opened with analysts predicting that Europe’s profit picture would improve but remain in the red. However, results came in better than expected, and eurozone companies reported their first quarter of positive year-over-year earnings growth in more than a year.
Other earnings highlights from around the globe are highlighted below.
S&P 500® Index companies posted their fourth consecutive quarter of positive earnings growth and their highest growth rate since Q4 2021 at 10.9%.2 Utilities and information technology companies posted the strongest results, while materials and industrials were the weakest.
Earnings growth was surprisingly strong in Europe at 4.1%, ahead of consensus estimates.3 The improvement came despite the negative impact of China’s economic slowdown on European exporters.
Profit growth slowed in Japan but remained positive at 3.3%.4 The information technology sector produced strong results, benefiting from government policy aimed at digitizing Japan’s economy.
The information technology and materials sectors helped drive earnings growth in emerging markets. EMEA earnings came in above expectations, while LatAm lagged. EM Asia beat forecasts, though China continued to drag on earnings growth.
Five Trends We’re Watching
1. AI, Reshoring and EVs Drive Utilities Sector Profit Growth
While often considered a sleepy area of the equity market, the utilities sector showed the highest earnings growth in the S&P 500 in the second quarter.
The sector's leadership is notable, considering that the rate of growth in U.S. electricity generation has been declining steadily since the 1950s. Factors contributing to this decline include slowing population growth, more energy-efficient appliances and a plateau in the growth rate for introducing electricity-consuming products.
More recently, themes such as artificial intelligence (AI), reshoring and electric vehicles (EVs) have triggered an inflection in energy demand that many predict will continue in the coming years. We expect AI to be particularly impactful. For example, ChatGPT consumes more power in a single day than a three-bedroom home uses in an entire year.5
As shown in Figure 1, forecasters expect electricity net generation growth to increase by 3.2% in 2024, which is higher than the average over the past 45 years.
Figure 1 | Powering Up: After Decades of Decline, Electricity Generation Is Rising
Data as of 8/6/2024. Source: U.S. Energy Information Administration (EIA). *Forecasts from EIA Short-Term Energy Outlook as of 8/6/2024.
“As data center growth accelerates to facilitate our economy’s shift to artificial intelligence, and as we continue to re-domesticate and electrify across multiple sectors, our nation must embrace an ‘all of the above strategy’ to meet increasing electric demand.”
John Ketchum, CEO – NextEra Energy
2. Consumer Spending Trends Show Mixed Signals
After years of absorbing higher prices without much pushback, many consumers may have finally had enough. Consumer-facing companies reported heightened pressure on their low-income customers, softness in discretionary and big-ticket purchases and signs that the slowdown is spreading to areas such as travel and lodging.
At the same time, Walmart and Target are benefiting as consumers shift to stores where they feel they’re getting better value. For example, Walmart reported that upper-income households led its share gains compared to other income cohorts. Overall, they didn’t see a deterioration in monthly results and aren’t detecting broad weakness in consumers' appetites.
Similarly, Target experienced growth in same-store sales. Their earnings reflected continued strong performance in the beauty category and improved discretionary sales, especially in apparel. The management team believes consumers are still willing and able to spend, but they’re budget-conscious and looking for deals and everyday values.
“We continue to gain market share, including in general merchandise, and transaction counts and unit volume are up across markets … So far, we aren't experiencing a weaker consumer overall.”
Doug McMillon, CEO – Walmart
3. China’s Economic Slowdown Impacts European Earnings
The prolonged property slump, a lack of government stimulus and high unemployment, particularly among youth, are hurting consumption trends in China. Consumers are pivoting away from big-ticket, discretionary purchases toward discounters and day-to-day basics.
Due to these headwinds and structural overcapacity, deflationary trends have set in. This is weighing on businesses catering to Chinese consumers, including Europe-based companies that target China as a key end market. Subdued consumer appetites affect a range of companies, including European car manufacturers and makers of luxury goods.
“Our industry is navigating through a period of persistent macroeconomic and geopolitical uncertainties, a period during which spending on luxury and premium apparel has been impacted by subdued consumer demand … the global retail environment has seen a further pullback in many key markets around the globe.”
Yves Muller, CFO – Hugo Boss
4. Magnificent Seven Companies Skewing S&P 500 Earnings Growth and Valuations
As in 2020 and 2023, the Magnificent Seven – the seven largest companies in the S&P 500 – continued to drive essentially all the earnings growth in the second quarter. The combined profit growth for these seven stocks was up 34%, while the aggregate growth rate for the other 493 companies was only 6%.6
As we discussed last quarter, the tide may be set to turn. Forecasts for the remaining two quarters of 2024 indicate an expected narrowing of the earnings growth gap between the Mag 7 and the rest of the S&P 500.
Strong earnings growth has led to significant stock price appreciation for the Mag 7 relative to the broader market. As a group, their 12-month forward P/E multiple broke away from the other 493 stocks in 2014 and remains elevated today. See Figure 2. However, the relative valuations are below the 2020 peak as companies have somewhat “grown into” their lofty valuations. The valuations for the rest of the pack are much closer to the S&P 500’s historical average.
Figure 2 | The Pack Is Poised to Catch Up to the Mag 7, but the Valuation Gap Remains Wide
Data from 8/20/1994 – 8/20/2024. Source: FactSet, American Century Investments.
5. AI Adoption Continues to Drive Earnings Growth
The entire AI value chain has become a material contributor to growth for many companies. Integrating AI models into new products and services opens new market opportunities for companies and drives additional productivity improvement for customers. Additionally, data center capacity and electrical infrastructure are key themes here.
“We continue to enjoy a robust demand for our solutions in Q2, driven by both net new customers and our broad installed base … Our Business AI strategy is making progress, playing a key role in these opportunities and customer interactions, and is helping to drive pipeline growth.”
Dominik Asam, CFO – SAP
The Earnings Outlook Is Mixed
Forecasts call for S&P 500 earnings to rise 5.2% in the third quarter and climb to 15.5% in the fourth quarter.7 Analysts expect input costs to continue to normalize, making comparisons to 2023 easier. Full-year estimates call for U.S. profits to grow 10.1% in 2024 and 15.3% in 2025.8
In non-U.S. developed markets, persistently high interest rates are driving a more visible slowdown in growth, particularly in cyclical areas of the economy. These headwinds may result in a downward resetting of earnings expectations. Weaker macro data and recession concerns have also pushed out expectations for an earnings recovery into 2025.
Authors
Amanda Rehmann, CIMA
S&P Global, 7/24/2024.
FactSet, as of 8/15/2024.
LSEG I/B/E/S, based on Stoxx 600 Index, as of 8/20/2024.
FactSet, based on MSCI Japan Index, as of 8/15/2024.
Zodhya Tech, “How Much Energy Does ChatGPT Consume?” Medium, May 19, 2023.
FactSet, as of 8/20/2024.
FactSet, as of 8/15/2024.
FactSet, as of 8/15/2024.
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