Latest / Markets with Megan: A Quick Financial Markets Update / Earnings Forecasts Clash with Economic Realities | Episode 182 | 10-22-24

Transcript

Earnings Forecasts Clash with Economic Realities | Episode 182 | 10-22-24 · Markets with Megan: A Quick Financial Markets Update

• 0:00
  Megan Horneman: Earnings season is starting to kick up here in the US.
• 0:03
  Megan Horneman: It is Tuesday, ctober 22nd, and third quarter earnings for the S&P 500 are starting to roll in.
• 0:10
  Megan Horneman: They started late last week with the financials and we got a good kickoff to earnings season with the financials.
• 0:16
  Megan Horneman: The main thing we look at financials is from a consumer perspective.
• 0:21
  Megan Horneman: What are they doing with their loan loss reserves?
• 0:22
  Megan Horneman: That means, are they sitting aside more money for the potential for losses on loans?
• 0:28
  Megan Horneman: And we got mixed results there.
• 0:30
  Megan Horneman: A couple of the major banks did not increase their loan loss reserves.
• 0:34
  Megan Horneman: Jp Morgan did, but they came out saying that this is primarily because they are increasing their credit card loan book, not because they think the consumer is in trouble.
• 0:43
  Megan Horneman: We would say that's not a great sign for the consumer that they're taking on more debt in order to fund their spending, especially with rates at over 20% on credit cards.
• 0:54
  Megan Horneman: So let's dig into some of the details of what we're looking for and what to expect for this earning season that'll go over the next several weeks.
• 1:02
  Megan Horneman: First of all, we only have like less than 20% of the S&P 500 index companies that have reported thus far.
• 1:09
  Megan Horneman: We're looking at the potential for earnings growth of about 3% on a year-over-year basis.
• 1:14
  Megan Horneman: That's the current estimate.
• 1:15
  Megan Horneman: It is down lower from the expectation that we had when we began the third quarter and if that holds, it will be the lowest growth rate we've seen since the second quarter of 2023.
• 1:28
  Megan Horneman: However, it would be the fifth consecutive quarter of positive earnings growth, so that's a positive.
• 1:35
  Megan Horneman: But when you dig into the actual details and we look at the Magnificent Seven, who have really carried earnings for quite some time, the story is still the same in the third quarter.
• 1:46
  Megan Horneman: When you look at the Magnificent Seven, who have really carried earnings for quite some time, the story is still the same in the third quarter.
• 1:49
  Megan Horneman: When you look at the Magnificent Seven, they're expected to be among the top 10 contributors to overall earnings growth for the index.
• 1:56
  Megan Horneman: If you look, those companies are projected to report a year-over-year earnings growth of almost 20%.
• 2:03
  Megan Horneman: So if you take those seven companies out of the earnings growth rate, you're actually looking at only, basically, earnings growth of 0.1% ona year-over-year basis for the S&P 500.
• 2:15
  Megan Horneman: So we're still looking at not only total return but also the earnings growth being driven so concentrated in these seven stocks.
• 2:23
  Megan Horneman: That's concerning to us.
• 2:24
  Megan Horneman: Earnings growth being driven so concentrated in these seven stocks that's concerning to us.
• 2:28
  Megan Horneman: On the other side, we are finally seeing some realistic expectations on earnings.
• 2:33
  Megan Horneman: I still think there's a way to go for these earnings to be revised lower.
• 2:35
  Megan Horneman: What we've talked about a lot is that the expectation for this year but, more importantly, next year for earnings is unrealistic and equities are pricing in this perfection in earnings.
• 2:47
  Megan Horneman: Right now, we're looking at a 15% earnings growth rate between 2024 to 2025.
• 2:54
  Megan Horneman: It's lower than it was a few months ago, but a 15% earnings growth rate when we've seen economic forecasts downgraded even this morning, the IMF came out and downgraded their outlook for global growth.
• 3:07
  Megan Horneman: This just doesn't mesh well here.
• 3:10
  Megan Horneman: There's going to be some, in our opinion, some more downgrades to 2025 earnings growth, which will result in more volatility from an equity perspective.
• 3:20
  Megan Horneman: Now we're also going to be looking specifically what companies are saying on the inflation front and also what are they thinking as far as the Federal Reserve rate cuts.
• 3:29
  Megan Horneman: Are they changing anything to their business because of the expectation for rate cuts?
• 3:33
  Megan Horneman: Are they still cautious because of the inflation picture?
• 3:37
  Megan Horneman: That's what we're going to be paying attention to.
• 3:39
  Megan Horneman: That's all we have today.
• 3:41
  Megan Horneman: We'll be back with some more economic data this week and any other market moving events that we have.
• 3:45
  Megan Horneman: If you like this podcast, please hit, subscribe, share with friends and colleagues.
• 3:50
  Megan Horneman: There's an alarm bell you can hit and if you want some of our historical podcasts, you can go to marketswithmeganf.
• 3:56
  Megan Horneman: Thank you.