The second quarter saw a mix of positive and negative surprises, leading to increased market volatility in recent weeks. In a note to clients published Wednesday, analysts at Societe Generale highlighted 10 lessons learned from the ongoing reporting season.
1)’Strong EPS, Weak SalesIn the second quarter, 78% of companies exceeded sales expectations in terms of earnings per share (EPS), which is above average levels, while only 58% of them exceeded sales expectations, which is the lowest in five years.
“The relative shock is in sales, and the relative surprise is in profit margins,” analysts noted.
2)’Profit margins are the story.“Margins continue their upward trend. Technology sector earnings have been improving for more than a year, reaching new highs, while non-technology earnings have also increased in the past two quarters. Margins typically lead capex growth by 4-5 quarters, with technology currently leading the acceleration in capex,” the bank said.
3)’Hits are rewarded more than mistakes are punished.On average, stocks that beat consensus estimates outperformed 2.8%, while stocks that missed out underperformed 1.3%.
4)’Sector PulseAt the sector level, the healthcare, materials and financial services sectors led the list with the highest percentage of gains, while the basic commodities, energy and consumer discretionary sectors lagged behind.
“Basically, both cyclical and defensive consumer stocks are lagging,” analysts said.
5)’style beatsQuality and growth patterns recorded the highest number of strikes in Q2, while high risk patterns recorded the lowest number of strikes at 68%.
6)’2Q24 upgraded, 3Q24 downgradedAccording to Société Générale, second-quarter earnings per share estimates rose 1.2%, while third-quarter estimates fell by the same amount. Total earnings per share for the S&P 500 are headed for $240 by year-end, close to the bank’s $243 estimate.
“The season has not moved a finger in terms of expectations for this year,” analysts commented.
7)’stock momentumMaterials and Technology sectors saw the strongest EPS momentum, in contrast to weak performance from the Energy and Commodities sectors.
8)’EPS view“Over the past four weeks, there have been EPS upgrades from eight stocks and downgrades from 10, in line with long-term averages, analysts noted. Financials and technology companies lead the upgrades, while materials and energy sit at the bottom.
9)’Six charts for the next six monthsSociete Generale highlighted two key themes for the next six months: earnings supporting the continued rotation towards broader market growth, and the impact of the US election on market trading. Notably, the earnings growth rate of the Nasdaq 100 is expected to slow, while earnings growth in the S&P 500 excluding the Nasdaq 100 is improving.
10)’SG’s turning point signals an improvement in the EPS cycle.Finally, Societe Generale said the SG Global Cycle Index has been in an uptrend for five quarters, with the US Consumer SG Index consolidating in positive territory for the past five months.
“Cyclical data is net positive, while the cross-asset momentum (XMOMO) signal suggests short-term risks,” the note read.
In conclusion, Societe Generale analysts see the higher profit margins as a boon, as they reinforce the ongoing earnings narrative and keep the S&P 500 in “buy on the dip” territory.
“Non-recessionary interest rate cuts by the Fed should not lead to a credit rating downgrade,” they wrote.
In addition, they identify cyclical opportunities outside the technology sector, particularly in the industrial and financial sectors.
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