Despite the concern of higher for longer interest rates, first-quarter earnings are running 5.6% above the same period a year ago. About 78% of companies reporting first-quarter earnings are beating estimates, and they are beating those estimates by an unusually wide margin: 9.5%, well above the long-term average of 4.2% and average of 7% for the prior four quarters. Companies that have had notable earnings beats include Alphabet, Meta and Netflix in the communication services sector; Goldman Sachs, JPMorgan Chase and Morgan Stanley in financials; GE Aerospace and Caterpillar in industrials; and Microsoft in technology. Most importantly: No matter how far out you look, the still-strong economy and strong jobs market is continuing to support earnings. S & P 500 earnings expectations Q2: up 10.9% (uptrend) Q3: up 8.8% (uptrend) Q4: up 14.9% (uptrend) Source: LSEG Resilient consumer is the key The good news: most companies continue to beat estimates and the vast majority have affirmed their 2024 earnings guidance. A few, including Merck, Ford, Chipotle, Waste Management, and Royal Caribbean, have raised guidance. Earnings have been holding up largely because the consumer remains resilient. “Consumer spend across all segments from low to high spend has remained relatively stable. Our data does not indicate any meaningful behavior change across consumer segments,” Visa’s CFO Christopher Suh said. American Express’ CEO Stephen Squeri echoed that sentiment, noting that “consumer spending is relatively strong.” Another key to profits holding up: net profit margins remain high at roughly 11.5%. This is the percentage of profit a company produces from its total revenue. Importantly, the analyst community believes net profit margins will be above 12% for the remaining three quarters of the year, according to FactSet. Valuations coming down So if earnings are up, why is the S & P off its highs? The simple answer is, the multiple (P/E ratio) is contracting. The multiple is what investors are willing to pay for a future stream of cash flow. That future stream of earnings and dividends could stay the same, but when rates go up investor risk appetite gets dampened and they are typically willing to pay less for that future stream At its peak at the end of April, the S & P 500 P/E ratio for 2024 earnings was about 21.6, high by historic levels. Today, a month later, 2024 earnings estimates are essentially the same but the multiple has declined to 20.8. What could be the…
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