Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

• For 2024 Q2, S&P 500 earnings are expected to be up +8.0% from the same period last year on +4.6% higher revenues. This will be the highest earnings growth rate since the +9.9% growth rate in the first quarter of 2022.

• Earnings growth for the Energy sector is on track to turn positive in Q2 after remaining in negative territory over the preceding four quarters.

• Q2 earnings for the ‘Magnificent 7’ companies are expected to be up +25.5% from the same period last year on +13.2% higher revenues. Excluding the ‘Mag 7’, Q2 earnings growth for the rest of the index drops to +4.3% (from +8.0%).

• For the 19 S&P 500 members that have reported quarterly results for their fiscal quarters ending in May 2024, total earnings are up +25.7% from the same period last year on +4.4% higher revenues, with 84.2% beating EPS estimates and only 36.8% beating revenue estimates.

JPMorgan (JPM Quick QuoteJPM - Free Report) , Wells Fargo (WFC Quick QuoteWFC - Free Report) , and Citigroup (C Quick QuoteC - Free Report) kick off the Q2 earnings season for the Finance sector on Friday, July 12^th. The expectation is for Finance sector earnings to be up +8.3% from the same period last year on +5.6% higher revenues, which would follow the sector’s +11.9% higher earnings on +7.3% revenue gain in the preceding period (2024 Q1).

The earnings outlook for the major banks has been improving lately, as underlying business trends have stabilized and may have actually started improving in some respects. We see this in the revisions trend, with analysts nudging their estimates higher, particularly for Q2, as actual trends on several fronts, including deposits, trading volumes, and investment banking fees, have turned out to be better relative to earlier expectations.

JPMorgan is currently expected to earn $4.19 per share in Q2 on $45.03 billion in revenues, representing year-over-year changes of -4.1% and +9%, respectively. The EPS estimate for the period has moved up a bit in recent weeks and we see the same trend at play Wells Fargo as well.

It is this stabilizing, if not altogether improving, earnings outlook that has been driving the group’s recent stock market performance. The chart below shows the year-to-date performance of JPMorgan, Citigroup, and Wells Fargo relative to the S&P 500 index.

Image Source: Zacks Investment Research

The very strong performance of Citigroup shares reflects market confidence in management’s current repositioning efforts rather than a favorable earnings outlook. Still, all of these money-center players have performed better than the broader market over this time period.

The group’s positive stock market performance also reflects optimism about the Fed, which is expected to start easing monetary policy later this year. The resulting improvement in financial conditions is not only expected to spur capital markets activities but also serve as a credit demand catalyst. We will be watching for management commentary on signs of moderation in economic activities, focusing on household finances, the commercial real estate space, and deal flow on the investment banking side.

Beyond the Finance sector, Q2 earnings for the S&P 500 index are expected to be up +8% on +4.6% higher revenues. As we have been flagging all along, the Q2 revisions trend has been very favorable, with estimates barely coming down since the quarter got underway. Estimates increased for the Tech, Utilities, Transportation, Autos, and Consumer Discretionary sectors, helping partly offset negative cuts for the other sectors.

The revisions trend for the Tech sector has been positive for a while now, which is important since the sector alone is on track to bring in almost 30% of all S&P 500 earnings over the coming four-quarter period.

The 2024 Q2 quarter will be the fourth consecutive quarter of robust Tech sector earnings growth, with total earnings for the sector expected to be up +15.7% from the same period last year.

For full-year 2024, Tech sector earnings are expected to be up +17.4%, followed by another strong showing expected next year.

The chart below shows how the aggregate earnings total for the Tech sector has evolved over the past year.

Image Source: Zacks Investment Research

A big contributing factor to the Tech sector’s positive earnings outlook is the sector’s margins outlook, as the chart below shows.

Image Source: Zacks Investment Research

We are already in record territory with Tech sector margins, with 2024 margins expected to exceed last year’s record level. The expectation is for some more gains next year and the year after, with the ever-growing share of higher-margin software and services in the overall Tech earnings pie explaining the favorable trend. Part of this likely also reflects optimism about the impact of AI on the sector’s productivity.

The Earnings Big Picture

The chart below shows the overall earnings picture on a quarterly basis.

Image Source: Zacks Investment Research

The chart below shows the overall earnings picture on an annual basis.

Image Source: Zacks Investment Research

Please note that this year’s +9.0% earnings growth on only +1.7% top-line gains reflects revenue weakness in the Finance sector. Excluding the Finance sector, the earnings growth pace changes to +8.9%, and the revenue growth rate improves to +3.9%. In other words, about half of this year’s earnings growth comes from revenue growth, with margin gains accounting for the rest.

On the margins front, 11 of the 16 Zacks sectors are expected to have higher margins in 2024 relative to last year, with Tech, Finance, and Consumer Discretionary as the big gainers.