The outlook for the main driver of the stock market continues to improve.
According to data from FactSet, S&P 500 (^GSPC) earnings rose 6% in the first quarter from a year ago. If we ignore Bristol Myers-Squibb’s (BMY) dismal earnings, results were even better, with 10% earnings growth per Bank of America.
This is because earnings expectations for future quarters are also rising. The consensus now calls for earnings to rise 11.4% in 2024, up from a 10.9% projection on April 5. In 2025, earnings growth estimates rose to 14.2% in 2025, up from 11.6% that day.
On Tuesday, UBS Investment Bank U.S. equity strategist Jonathan Golub raised his year-end S&P 500 target to 5,600 from 5,400, citing “stronger gains.”
“While earnings expectations for the following quarter typically decline during earnings season, [second quarter] The estimates have also been quite robust,” Golub wrote. “A similar pattern is also evident in the full-year 2024 estimates. These trends all support further market upside potential.”
Earnings figures are one of many reasons why Wall Street strategists have raised their S&P 500 year-end targets. Golub and others have noted that economic “tail risks” have declined, with consensus estimates for economic growth increasing throughout the year.
Binky Chadha, Deutsche Bank’s chief global strategist, recently told Yahoo Finance that further economic growth than expected could help the S&P 500 reach 6,000 points by the end of the year. But for its current target of 5,500, much of the case is based on earnings growth that is “accelerating and continues to accelerate.”
“We see the earnings cycle has plenty of potential,” Chadha wrote in a research note in which he raised his year-end S&P 500 target to 5,550 from 5,100 on May 17. a sustained recovery that will accelerate towards the end of the year and support equity multiples.”
Chadha, like other strategists, had been looking for a rotation in earnings growth to begin in the first quarter, with Big Tech growth starting to slow and other sectors catching up. That didn’t quite happen. A basket of stocks Chadha tracks titled “Mega-Cap Growth and Tech” grew about 39% year-over-year, roughly flat from the previous quarter’s 40% year-over-year growth.
According to Chadha, this in itself is not a problem. He believes the robust earnings growth in this group, which also includes tech stocks ‘Magnificent Seven’, along with a few other big names like Netflix (NFLX), Visa (V) and Adobe (ADBE), is ‘very likely to slow down’. at some point.” And that will happen because positive developments are emerging beneath the surface in other parts of the market.
Profits for Cyclicals and Defensives rose 7.5% in the first quarter, which Chadha says is ‘healthy’. Other strategists believe that a similar catch-up scenario for earnings growth will occur for the rest of this year.
Bank of America US and Canadian equity strategist Ohsung Kwon highlighted in a recent research note that Nvidia was responsible for 37% of the S&P 500’s earnings growth over the past 12 months. Over the next 12 months, this is expected to be just 9%.
“We don’t think it’s just about Nvidia anymore,” Kwon told Yahoo Finance. “Things are expanding… into energy, raw materials, utilities and things like that.”
Strategists like Kwon say the most glaring flaw in the fundamental story for stocks is the cost cuts fueling earnings growth, rather than increased demand and booming revenues. Kwon and Bank of America remain steadfast in their belief that this will change later this year, as companies in the industrial sector have indicated they believe they have reached the low point in their cycle of declining demand.
“We will see demand recover in the second half of the year,” Kwon said. “And with that, we will see operating leverage and better margins.”
Charles Schwab senior investment strategist Kevin Gordon noted that this will be a key trend for investors throughout the year. In the first quarter, companies that exceeded revenue expectations performed better than companies that just exceeded profit expectations.
For Gordon, this was the market that targeted companies that simply wanted to increase profits through cost savings.
‘The market tends to sniff around [cost-cutting] out and at some point say, okay, now we need to actually see real demand come back online,” Gordon told Yahoo Finance.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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