4 Equity Insights From a Mostly Sunny Earnings Season

Strong Q1 earnings were a bright spot as sticky inflation and dimmed expectations for rate cuts cast some shade on U.S. equity markets. Fundamental Equities investor Carrie King looks beyond the headlines to offer four takeaways from the most recent earnings season.

1. Tech+ shines again

S&P 500 earnings growth of 5% was driven primarily by the mega-cap tech+ stocks. Removing the top seven index constituents by market cap brings index earnings growth to -2% for the quarter.

We remain positive on technology and internet stocks but expect the earnings growth chasm between these leaders and the rest to close as two divergent business cycles each normalize. The tech-led cycle is ahead of the broader market, having soared, declined and reaccelerated since COVID. Other sectors are just now working off their pandemic malaise and looking to a brighter future, as we discussed last quarter. We expect the earnings growth of the rest of the market to catch up to today’s leaders by the end of this year, as shown in the chart below.

Amid the broadening, we see opportunity for stock pickers to parse through the fundamentals to identify those companies with the potential to lead in the next leg of the business cycle.

Consensus expectations for year-over-year earnings growth, 2024

Investment takeaway: Broaden your investment lens as the earnings growth gap narrows and opportunities open in other areas of the economy. We prefer healthcare, where innovation is robust and valuations are below the market average. We also see improving prospects in industrials as years of underinvestment are poised for reversal. The American Society of Civil Engineers calculates an infrastructure spending gap of about $2.5 trillion, and the federal government is demonstrating bipartisan support for helping to close it. Momentum here should present stock selection opportunities among industrials.