Three big things you need to know today: First, we’ve done some housekeeping on our S&P 500 EPS estimates for 2024 and 2025, resulting in very modest changes. Second, we highlight the two things we’re paying the most attention to in reporting season – specifically, qualitative color from companies on hot macro topics and whether mega cap Growth can maintain its earnings dominance. Third, we highlight what else jumps out from our high frequency indicators on sentiment and the US election.
If you’d like to hear more, here’s another 5 minutes. Now, let’s jump into the details.
: Housekeeping on Our:
• We’ve refreshed our S&P 500 EPS model for 2Q24 actual results and changes to the consensus macro forecasts that feed into our model on things like GDP, inflation, and interest rates.
a result, we are lowering our:
• We see these changes as very minor. We’re a little bit below the bottom-up consensus for 2024, which is tracking at $245. For 2025, we’re about 5.6% below the consensus which is now at $285, but this is in line with the typical revision.
Moving on to Takeaway #2: The Two Things We’re Paying Most Attention in the 3Q24 Reporting Season
• The first thing we’re watching is qualitative color from companies on the macro backdrop, the state of the consumer, and how they are thinking about the US election, geopolitics, inflation, interest rates and the Fed.
• When we look at the trends over time, we find that in their earnings calls US public companies are talking a lot less about labor. Layoff and recession-related commentary has also been low.
• Discussion of AI and the Fed/interest rates remains near all-time highs.
ed to levels on par with late:
• From our recent transcript reading, I thought some of the Financials that reported late last week did a good job of providing supporting evidence for the soft landing – specifically one bank’s comment that they’ve been looking for signs of changes in consumer health but haven’t found any yet, and another’s view that the consumer remains on solid footing.
• Otherwise, consumer discussions over the past few weeks have continued to emphasize the pressures from higher interest rates and the cumulative impact of inflation, the resilience of the consumer, especially at the higher end, despite challenges, and the ongoing difficulties faced by lower-income consumers.
• On the US election, one thing that jumped out was one bank’s comment that getting past the election and seeing interest rates come down a bit could help restore client confidence about engaging in business activity.
• The second thing we’re watching is whether or not Mega Cap Growth maintains its earnings dominance. The leadership transition away from mega cap growth has been choppy. I think it’s been driven by crowding, overvaluation, and decelerating EPS growth among the mag 7 names.
ve actually improved for both:
• The rate of upward revisions to EPS forecasts has also been stronger for the biggest market cap names in the S&P 500 than the rest of the stock market. We think earnings sentiment needs to improve for the rest of the market for a smoother leadership transition to occur and will be watching these stats closely in coming weeks.
Takeaway #3: A few things jumped out from our high frequency indicators on sentiment and the US election.
• The main one to call your attention to is that AAII net bulls are now officially signaling caution. As of 10/10/24, the weekly data point on AAII net bulls was 28.4% and the four-week average was tracking at 24.2%. Both are more than one standard deviation above the long-term average (22%), a level that has been a short-term negative signal for stock market direction in recent years.
• Another worth flagging is that uncertainty around the US election persists. As of Friday evening, Trump had pulled ahead of Harris in the PredictIt betting market and many swing states, though Harris had maintained a lead in the RCP national polling average. With the election less than a month out, it’s worth noting that various gauges of stock market volatility have also moved up a bit, something that is normal in presidential election years.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
