Earnings season kicks off this week and we preview the S&P 500 2024 Q3 earnings season in granular detail, providing both aggregate and company-level insights using data from I/B/E/S, StarMine, and Datastream, which are all found in the desktop solution LSEG Workspace.
Earnings Commentary
For the second consecutive quarter, aggregate earnings are expected to reach a new all-time high, with a current estimate of $511.4 billion in Q3, surpassing last quarter’s actual figure of $504.8 billion. However, this quarter’s earnings face tougher year-over-year comparisons, resulting in an expected growth rate of 5.0%, down from the 13.2% seen last quarter. It’s prudent to look at the trajectory of absolute earnings over time, and we are expected to continue seeing new all-time highs in the quarters ahead. Additionally, revenues in Q3 are also projected to reach a new all-time high.
Earnings growth expectations were revised downwards by 320 basis points heading into this earnings season. This aligns closely with a common trend, as we typically find that analysts lower estimates by an average of 330 basis points before earnings season, based on data from the last two years. Energy saw the largest downgrade of 1,670 bps, followed by Materials (-1,180 bps) and Industrials (-760 bps). Only three sectors—Financials, Information Technology, and Communication Services—saw an upgrade heading into earnings season, and even then, the increase was minimal at just 50 basis points. This modest improvement highlights a cautious tone from analysts.
The Energy sector is facing a large negative EPS Predicted Surprise (PS%) of -3.9%, signaling that StarMine expects most companies in the sector to miss on the bottom line. A PS% below -2% is considered significant, and StarMine research indicates that in cases like this, it accurately predicts the direction of the earnings surprise 70% of the time. The large negative PS% also suggests divergent opinions among sell-side analysts, which can lead to increased volatility when companies report earnings, as market reactions may be more unpredictable.
The Magnificent-7 have played a significant role in driving earnings growth for several quarters which is expected to continue in Q3, boasting an aggregate earnings growth rate of 19.0%. Excluding the Mag-7, the Q3 earnings growth declines from 5.0% to 2.1%. However, we expect this dominance to begin subsiding starting next quarter, as the rest of the S&P 500 index, often referred to as the “S&P 493,” starts to contribute more to overall earnings growth.
From a guidance perspective, we have seen 62 negative Q3 EPS pre-announcements compared to 40 positives, resulting in a negative/positive ratio (n/p) of 1.6. This is below the long-term average of 2.5 and prior four-quarter average of 2.2. The number of positive pre-announcements is currently at a four-quarter high.
Part 1 – Earnings Growth and Contribution
Using data from the October 4th publication of the S&P 500 Earnings Scorecard, Q3 blended earnings (combining estimates and actuals) are forecasted at $511.4 billion (+5.0% y/y, +1.3% q/q) while revenue is forecasted at $3,974.9 billion (+4.0% y/y, +1.2% q/q).
At a sector level, Industrials is expected to continue its streak of positive y/y earnings growth at fifteen consecutive quarters, the longest of any sector. Consumer Discretionary, Consumer Staples, and Financials are all expected to see a seven consecutive quarter of growth. Materials is expected to post a ninth consecutive quarter of earnings decline.
Exhibit 1 highlights earnings growth contribution, which can be useful compared to simply looking at year-over-year growth rates, as contribution breaks down the actual impact each sector has on overall earnings growth. Nine sectors have positive earnings growth contribution, led by Information Technology, Health Care, and Communication Services.
Exhibit 1: S&P 500 2024 Q3 Earnings Growth Contribution
We also examine earnings growth contribution at the constituent level in Exhibit 1.1, highlighting the top 10 and bottom 10 contributors. Pfizer, Eli Lilly, and Moderna is expected to deliver the lion share of earnings growth for Health Care, influenced by an easier year-over-year comparison. Nvidia, Micron, and Apple lead the way for Information Technology, while Amazon stands out in Consumer Discretionary, and Meta and Alphabet in Communication Services. In other words, the “Magnificent Seven” will once again be a key group to watch this quarter, with five of the seven appearing in the top 10.
The last two columns in Exhibit 1.1 highlight the StarMine Combined Alpha Model (CAM) and StarMine Analyst Revision Model (ARM) scores for each constituent. StarMine model scores are ranked from 1-100 (percentile) with scores above 70 indicating a bullish signal while scores below 30 indicate a bearish signal.
Pfizer have the highest CAM scores in the group, which contrasts with Moderna, who has the lowest CAM score. CAM combines all available StarMine alpha models in an optimal, static, linear combination.
Pfizer also has the highest ARM score, followed by Nvidia, Eli Lilly, and Meta Platforms. Many companies in the Energy sector have ARM scores below 30. ARM is a stock ranking model that is designed to predict future changes in analyst sentiment by looking at changes in estimates across EPS, EBITDA, Revenue, and Recommendations over multiple time periods.
Marathon Petroleum appears in our Q3 earnings season forecast, where we predict five companies that will beat earnings and five companies that will miss. To see our Q3 picks, please click on the link here: StarMine 2024 Q3 Earnings Forecast: Predicting Beats and Misses for Russell 1000 Companies
Exhibit 1.1: S&P 500 2024 Q3 Earnings Growth Contribution
Part 2 – Market Cap vs. Earnings Weights
Exhibit 2 compares the difference between ‘market-cap’ and ‘share-weighted’ weights for the S&P 500 sectors. The S&P 500 Earnings Scorecard utilizes a share-weighted methodology.
Information Technology has the largest earnings weight this quarter at 22.4%, compared to its market-cap weight of 31.6%. This results in the largest negative weight differential of all sectors, highlighting the premium on the sector, which has a forward P/E of 28.6x.
Financials has the second largest positive earnings weight differential at 4.2% with a forward P/E of 16.2x.
Notably, Energy’s earnings weight has declined for five consecutive quarters, now standing at 5.5%. However, it continues to overdeliver on earnings relative to its market cap weight and trades at the cheapest valuation of any sector at 13.4x.
The Magnificent Seven group — Apple, Amazon, Alphabet, Meta, Microsoft, NVIDIA, and Tesla has a market cap weight of 31.5% compared to earnings and revenue weights of 19.4% and 10.8%, respectively. The Mag-7 has an aggregate forward four-quarter P/E of 29.6x, a 38% premium to the overall index. When excluding the Mag-7, the forward P/E declines to 19.0x.
Exhibit 2: Market Cap vs. Share-Weight for S&P 500 Sectors
Part 3 – Analyst Sentiment and Revisions Heading into Earnings Season
Using the Aggregates app in LSEG Workspace, we can aggregate individual company data to a sector level and overlay various StarMine quantitative analytics, providing an insightful top-down view as shown in Exhibit 3.
The first column displays the StarMine Predicted Surprise (PS%), which compares the SmartEstimate© vs. Mean Estimate. The PS% is a powerful quantitative analytic that accurately predicts the direction of earnings surprise 70% of the time when the PS% is greater than 2% or less than -2%. The SmartEstimate© places a higher weight on analysts who are more accurate and timelier, thus providing a refined view of consensus. The SmartEstimate© is also used as an input to many of the StarMine models.
Energy has an aggregate PS% of -3.9% which highlights that most companies in this sector are expected to miss earnings vs. analyst expectations. Specifically, 16 of the 22 constituents have a PS% less than -2%. The large negative PS% also suggests divergent opinions among sell-side analysts, which can lead to increased volatility when companies report earnings, as market reactions may be more unpredictable. Exhibit 3.1 highlights the PS% at a constituent level.
In terms of Analyst Sentiment, Communication Services has the highest ARM score of 73, driven by Meta Platforms with an ARM score of 96, followed by Alphabet (80), and Netflix (83). This sector has seen many high-flyers with a Price Momentum score of 79, making it ‘expensive’ according to the Relative Valuation and Intrinsic Valuation models with scores of 31 and 30 respectively.
Earnings Quality (EQ) measures the reliability and sustainability of the sources of a company’s earnings sources. Communication Services and Information Technology have the highest scores, attributed to the strong earnings and cash flow profiles of mega cap tech companies generating significant free cash flow.
The Combined Credit Model (CCR) projects the 12-month forward looking probability of default (or bankruptcy) based on equity market data, analyst estimates, company financials, news, and announcements.
Exhibit 3: Aggregates App – StarMine Analytics for S&P 500 Sectors
Source: LSEG Workspace
Exhibit 3.1: Aggregates App – Predicted Surprise % for Energy Sector
Source: LSEG Workspace
Next, we use the Screener app in LSEG Workspace to identify yet-to-report constituents that have experienced the largest upgrades and downgrades heading into earnings season. Exhibit 4 highlights companies that have seen earnings downgrades, defined by the 60-day mean estimate change in ‘EQ1 Preferred Earnings’.
Preferred Earnings is defined as EPS for most companies except for Real Estate where it can be either EPS or FFOPS depending on analyst coverage.
Warner Bros Discovery has seen the largest downgrade in EPS estimates over the last 60 days (-601.1%), followed by Boeing (-208.2%), Estee Lauder Companies (-85.8%), Take-Two Interactive Software (-57.9%), and GE Vernova (-56.6%). Note: values less than -100% occur when an EPS estimate turns from positive to negative.
Exhibit 4: Largest Negative Revisions for 2024 Q3
Source: LSEG Workspace
We observe a positive correlation between constituents that have seen a large downgrade and a corresponding negative PS%. Additionally, there is a positive correlation between the mean estimate change and the ARM score, indicating that companies with significant downward earnings revision also tend to have low ARM scores.
Examining the PS% and ARM columns can be very useful during earnings season to assess the likelihood of companies beating or missing earnings, while also gauging analyst sentiment.
The screener app provides a powerful workflow tool for Analysts and Portfolio Managers, enabling them to parse through hundreds of companies during earnings season to identify thematic trends.
Exhibit 4.1 displays the same data for constituents with the largest upgrades heading into earnings season.
Exhibit 4.1: Largest Positive Revisions for 2024 Q3
Source: LSEG Workspace
Part 4 – Net Profit Margin Expectations
Using data from the S&P 500 Earnings Scorecard (subscribe here), we examine quarterly net profit margins (Exhibit 5).
The Q3 blended net profit margin estimate has remained stable at 11.7% over the last three months.
Over the past three months, every sector except for Communication Services saw its net margin estimate decline. Energy experienced the largest decline in margin expectations (-205 bps, current value: 8.2%), followed by Materials (-117 bps, 9.2%), and Information Technology (-91 bps, 24.3%).
The 2024 and 2025 full-year estimates are currently 11.7% and 12.5%, respectively, while the forward four-quarter estimate is 12.3%.
The Magnificent Seven has an aggregate Q3 net margin estimate of 23.2%.
Exhibit 5: S&P 500 Net Margin Expectations
Part 5 – Forward P/E & PEG Ratio
Using LSEG Datastream, the forward 12-month (F12) EPS is $264.60 per share (Exhibit 6), as the majority of the estimate shifts to the 2025 estimate of $271.80 per share.
Over the past year, the 2025 EPS estimate has remained range-bound between $269-$275 per share. In comparison, the S&P 500 has risen by approximately 33% over the same period, leading to an expansion in the forward P/E multiple.
The S&P 500 forward 12-month P/E ratio (time-weighted basis) is currently 21.5x, ranking in the 91st percentile since 1985 and representing a 18.3% premium to its 10-year average of 18.2x. For reference, the trough forward P/E during the last four recessions were as follows: 10.1x (Oct 1990), 17.3x (Sept 2001), 8.9x (Nov 2008), and 13.0x (March 2020).
Additionally, the S&P 500 ‘PEG’ ratio is currently 1.26x, ranking in the 52nd percentile since 1985 and at a 10.2% discount to its 10-year average of 1.40x.
Exhibit 6: S&P 500 EPS Estimates
Conclusion
Q3 earnings are poised to reach new all-time highs, both in terms of absolute earnings and revenues, despite facing tougher year-over-year comparisons. Sectors like Financials, Information Technology, and Communication Services have seen slight upward revisions, while the Energy sector is expected to underperform, with a significant negative Predicted Surprise of -3.9%.
As the dominance of the Mag-7 begins to subside, the broader index is expected to contribute more to earnings growth in the quarters ahead, signaling a potential shift in market leadership.
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