Written by Joseph Adinolfi
The gap in earnings growth between the largest S&P 500 companies and the rest is expected to narrow in the second half of 2024
Analysts may have offered the best argument for why the stock market rally will continue to grow, if the current market pullback proves to be temporary.
After expanding at a breakneck pace over the past year, revenue growth for the S&P 500’s largest companies is expected to slow in the coming quarters. Fortunately, just as Big Tech’s earnings growth is starting to slow, Wall Street analysts expect growth for the rest of the S&P 500 to pick up.
This could send the S&P 500 higher into the second half of the year, perhaps even allowing other sectors of the market to displace leadership from the mega-tech stocks that have dominated U.S. stock returns over the past year. It might become.
“Given the high correlation between stock price outperformance and earnings for tech companies, we expect a narrowing of the growth gap to be a catalyst for market expansion,” said Savita Subramanian, top equity strategist at BofA Global Research. touched on the theme. In a report shared with MarketWatch on Monday.
The so-called Magnificent Seven – a group of seven mega-cap companies including Apple Inc. (AAPL), Meta Platforms Inc. (META), Nvidia Corp. (NVDA), Microsoft Corp. (MSFT), and Tesla Inc. (TSLA). , Amazon.com Inc. (AMZN) and Alphabet Inc. (GOOG) (GOOGL) – Revenues increased a whopping 63% in the fourth quarter of 2023, accounting for nearly all of the index’s revenue increase.
However, FactSet estimates that first-quarter earnings growth for the top 10 S&P 500 companies is expected to be 32% in the first quarter of 2024. Other indexes fell 0.4% year-on-year.
Fortunately, by the second quarter, earnings growth for the other 490 companies in the index is expected to start accelerating, further boosting the index’s total earnings. Ultimately, Wall Street analysts expect profits for S&P 500 companies to rise about 11% in 2024.
By the fourth quarter, growth is expected to be more or less flattened, with the top 10 stocks growing at 17.2% and the other 490 companies at 17.8%, according to FactSet data.
Subramanian said the stock market’s ferocious rally is likely to slow as a result, as the outperformance of Big Tech companies is closely tied to exceptional profit growth.
This should give other stocks and sectors an opportunity to take over. Indeed, there are signs that a long-awaited change in market leadership has already begun. Energy stocks XX:SP500.10 were the best performing S&P 500 sectors in March as oil prices rose to their highest levels since October.
The S&P 500 also outperformed the tech-heavy Nasdaq Composite in 2024, according to FactSet data, another notable change from last year’s Big Tech-driven market.
According to Subramanian, profit growth has been a major contributor to the stock price rise since the beginning of 2024.
According to Subramanian’s calculations, while macro factors such as interest rates have driven the market for much of the past two years, that will begin to change in 2024, with earnings expectations playing a larger role. The S&P 500 index has risen nearly 40% since the bull market began in October 2022, according to FactSet data.
The decline in share prices that began in April should be temporary as long as earnings continue, according to the UBS Group strategist team.
The S&P 500 SPX was down 3.7% from its late March high of 5,060 points early Tuesday afternoon, and was largely unchanged on the day after bouncing between gains and losses the previous day. In recent trading, the Nasdaq Composite Index rose 0.1% to 15,892 points, and the Dow Jones Industrial Average DJIA rose 105 points, or 0.3%, to 37,845 points.
-Joseph Adinolfi
This content was generated by MarketWatch, a Dow Jones Company. MarketWatch is published independently of the Dow Jones Newswires and the Wall Street Journal.
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04/20/24 0740ET
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