High hopes for the U.S. equity market this year are underpinned by expectations of robust corporate profits, and early indications of 4Q24 earnings have not disappointed. Earnings per share for the S&P 500 is projected to be $62.30, representing growth of 12.2% y/y and 1.1% q/q. Of the 9% of market cap that has reported so far, 79% of companies have beaten estimates, above the 10-year average of 75%. Companies are also surprising by more than usual. Reported earnings are 9.1% above expectations compared to the 10-year average of 6.7%.

Looking at the three main sources of EPS growth, sales, margins and buybacks are expected to contribute 4.2, 8.9 and -0.9 percentage points, respectively, to y/y growth. As GDP growth moderates and year-over-year comparisons get tougher, companies’ ability to defend their margins should be an increasingly important driver of earnings growth.

From a sector standpoint, a few major trends are beginning to emerge:

• Financials are tracking 15% above expectations. Large cap banks are driving most of this upside, thanks to increased investment banking fees from M&A and trading activity, particularly in equities and leveraged loans. Commercial loan growth, however, has remained tepid. Hopes for a recovery here, strong M&A backlogs, a steeper yield curve, and prospects for deregulation, all signal further upside ahead.
• The Magnificent 7 are expected to report earnings growth of 23% this quarter compared to 9% for the S&P 493. While the dispersion remains large, it has closed significantly since 1Q24 when the Mag 7 grew by 50% and the 493 contracted by 2%. There are also divergences underneath the moniker. While semiconductor and cloud businesses are already seeing billions in AI revenue, investors will be looking for clear signs of AI monetization in advertising and search-based companies.
• Earnings in industrials, energy and materials are set to contract. The manufacturing and construction cycles have struggled through a two-year slump as companies first de-stocked their inventories ahead of a potential recession and have now delayed restocking amid interest rate and regulatory uncertainty. However, lower rates, potentially stimulative industrial policy and an expanding business cycle could support growth in industrials and materials earnings as 2025 unfolds. Energy, on the other hand, is unlikely to recover anytime soon absent an oil price spike. OPEC has spare capacity, and the Republican administration’s proposals for deregulation and increased U.S. production present further downside risks for oil prices.

Expectations are high and rich valuations leave little room for a stumble. Nevertheless, fundamentals look strong. Above-trend GDP growth, easing monetary policy and healthy household and corporate balance sheets should support high single-digit EPS growth well into 2025.

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