In this week’s economic update, we examine the most recent earnings results and their impact on the equities market. Specifically, we’ll be unpacking the influence of the “Magnificent Seven” on the market’s overall earnings growth, and speaking to the themes raised by management teams as we look towards the remainder of the year.
We are also sharing the most recent episode from The Download, where RBC Global Asset Management’s David Richardson and Stu Kedwell CFA explore the impact of February’s CPI data on markets and potentially on central bank policy around interest rates.
Economic Update
Global equity markets have maintained their strong start to the year, despite investors needing to recalibrate their expectations for the timing of interest rate cuts. Recent global economic data has been mixed, whereas in the U.S. it has largely exceeded expectations, with the latest inflation reading suggesting a modest uptick in price pressures.
Meanwhile, minutes from the U.S. central bank’s recent meeting revealed that policymakers continue to ponder the risks associated with premature rate reductions.
This week, we discuss the earnings season (now in its final stages) in our economic update.
Better than expected earnings results impacting equity markets
A key factor behind the equity market's strength lately has been earnings results. Fourth quarter U.S. earnings are set to rise by just over 3% year-over-year, roughly double the expected pace. Though not remarkable in absolute terms, this growth is notable given the anticipated drag from higher interest rates on operating profits.
‘Magnificent Seven’ playing key role in overall earnings growth
Earnings results were especially strong across some pockets of the Consumer, Industrials, and Technology sectors. The “Magnificent Seven” technology-centric stocks, which make up nearly 30% of the U.S. S&P 500 index, have been crucial to driving the market’s overall earnings growth due to their sheer size and influence. Without their contribution, earnings growth would have declined by 4% year-over-year. In other words, while the U.S. market’s earnings growth looked fine relative to expectations, the strength of its underlying companies may be overstated given the lack of breadth.
Management teams are painting a reasonably positive picture
During this earnings season, comments from management teams have been generally positive with respect to consumer demand, although several noted consumers’ growing sensitivity to prices. Nevertheless, many companies highlighted robust economic indicators, such as high job creation and low unemployment claims. In their view, this suggests consumers can continue to spend, albeit with budgets strained by inflation. And while retail sales numbers recently came in below expectations, they remain significantly higher than pre-pandemic levels.
Management perspectives varied on operating conditions, with some looking for clearer guidance on interest rates and others voicing concerns over persistent inflationary pressures and cost challenges. Across the board, there was a clear focus on cost management and profit margin improvement.
Summary
As we look to the rest of 2024, earnings growth is expected to pick up. Analyst estimates suggest an earnings growth rate of nearly 9% for the year. And unlike the past year, this growth is anticipated to be more broadly distributed across various companies, not just the “Magnificent Seven”. This more evenly distributed earnings growth would be a welcome development, but this outlook is predicated on several assumptions: consumer and business demand that remain resilient and potentially improve, a deceleration in inflation, and lower interest rates. While such a scenario is entirely possible, it is impossible to predict the potential near-term outcomes with complete certainty, given how far interest rates have moved over the past few years and questions regarding inflation’s future trajectory.
Podcast: Will hot inflation numbers cool down market enthusiasm? (15 min)
With February’s CPI data coming in hotter-than-expected, markets were quick to react. Could this influence central banks to change their tune yet again on interest rate hikes? How can investors think through these short-term bumps in the market and stay focused on the long term?
In this latest episode of The Download, Stu Kedwell CFA (Managing Director, Senior Portfolio Manager & Co-Head of North American Equities, RBC Global Asset Management), unpacks these questions with host Dave Richardson (Managing Director & Head, Enterprise Strategy, RBC Global Asset Management).
You can find this episode wherever you listen to podcasts, or by clicking here.
As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.