The third-quarter earnings season for 2024 is underway, and it’s painting an interesting picture for investors. The S&P 500 continues to push to new all-time highs, fuelled by favourable fundamentals, supportive Federal Reserve policy, and better-than-expected results from major sectors like banking and technology. But there’s more than meets the eye in these headlines.
While AI-driven profits are still strong, they’re beginning to slow, and consumer fatigue is becoming more evident across the board. On top of that, geopolitical and global macroeconomic factors are creating challenges, and the upcoming US elections could trigger shifts in market dynamics. So, how should investors make sense of it all, and what can they expect for their portfolios? In this blog, we’ll explore the main takeaways from Q3 2024 earnings reports, breaking down the performance across key sectors, while considering both the near- and long-term market implications. Let’s jump in.
1. AI-Driven Tech Profits Remain Strong, But Growth Is Slowing
Artificial Intelligence (AI) has been one of the most transformative trends in tech, continuing to drive profits. Companies like Nvidia and AMD have been riding the wave of demand for AI chips, while Tesla’s innovation in robotaxis is another sign of AI’s expanding role in various industries.
For Q3 2024, technology companies, particularly the Magnificent Seven (including names like Apple, Microsoft, and Google), are expected to show 15% profit growth year-over-year. That’s certainly impressive, but it’s notably slower than the 30% growth tech companies saw in 2023, signalling that while the AI revolution isn’t slowing down, the pace of profit growth is becoming more sustainable.
What does this mean for investors?
While AI will remain a critical driver of tech profitability, we’re moving past the phase of rapid, speculative growth into a more stable and gradual expansion. For investors, this is a reminder to temper expectations when it comes to immediate returns from AI-driven tech stocks. Instead, focus on companies that are well-positioned for long-term innovation and integration of AI across various sectors.
2. Broader Market (‘S&P 493’) Primed for Gains, But Not Until 2025
Beyond the tech-heavy Magnificent Seven, the remaining S&P 493 is also showing some recovery. Q3 2024 is expected to mark the second consecutive quarter of profit growth, with analysts forecasting a 1.8% profit increase. While the growth here is slower, the longer-term outlook remains positive, particularly as we head into Q1 2025, when analysts predict double-digit profit gains across the broader market.
Sector breakdown:
- Healthcare has been a standout performer, largely due to sales of GLP-1 weight-loss drugs from companies like Eli Lilly. These drugs accounted for nearly 40% of the company’s revenue in Q2 2024, and healthcare profits are expected to have grown more than 9% over the past four quarters.
- On the flip side, the energy sector is expected to post a 20% decline in profits, driven by a 17% drop in crude oil prices during the quarter. This highlights the volatility in commodity markets and the broader energy sector, which remains under pressure.
What’s next for investors?
For those invested in the broader S&P 493, the key will be patience. While we may not see significant gains until early 2025, the long-term outlook remains positive for sectors like healthcare, financials, and consumer goods. Investors should keep an eye on healthcare innovations, as well as the recovery in consumer discretionary spending as interest rates stabilize.
3. Consumer Fatigue: The Cracks Are Starting to Show
One of the most critical drivers of economic growth is the consumer, responsible for nearly two-thirds of the US economy. But as we head into Q4 2024, signs of consumer fatigue are starting to emerge. The tight labour market has helped keep spending afloat, but higher prices and interest rates are finally starting to weigh on discretionary spending.
- Cash-based discretionary spending on things like dining out and travel remains strong.
- However, financed discretionary spending (big-ticket items like autos, RVs, and furniture) is seeing a pullback, signalling that higher borrowing costs are taking their toll.
What’s the outlook?
Investors should monitor the consumer sentiment closely as we approach the holiday season. While discretionary sectors may struggle in the short term, there could be opportunities in non-discretionary sectors, like healthcare and utilities, which tend to be more resilient during times of consumer uncertainty.
4. US Elections Could Trigger Market Shifts
With less than three weeks to go until the 2024 US elections, markets are bracing for potential shifts. Elections can create short-term volatility, especially as investors try to anticipate changes in fiscal and regulatory policies.
- A potential change in administration could redirect attention toward international markets and global trade, benefiting companies with strong overseas exposure.
- On the other hand, sectors like big tech may face regulatory scrutiny depending on the election outcome, especially if antitrust challenges against major firms like Google continue to gain traction.
What should investors do?
It’s wise to stay the course with current equity allocations until more clarity emerges post-election. While it’s tempting to preemptively reposition portfolios, the risk of mistiming the market outweighs the benefits. However, once the dust settles, there could be substantial opportunities for international diversification, particularly as the US dollar weakens and foreign markets offer more attractive valuations.
5. Global Macro Factors: China’s Slowdown Hurts Luxury Goods
Beyond domestic concerns, global macroeconomic factors are weighing on some sectors, especially luxury goods. China, one of the biggest markets for high-end products, is facing an economic slowdown, driven by overbuilding and reduced consumer demand.
- Luxury brands like LVMH and Ralph Lauren are feeling the pinch, reporting lower sales as Chinese demand weakens.
- Additionally, geopolitical risks in regions like Ukraine and the Middle East continue to create supply chain disruptions, driving price volatility in energy and commodities.
Investor strategy:
For investors, the takeaway here is to be cautious with luxury goods and other sectors heavily dependent on Chinese demand. Instead, focus on diversified companies that can weather these macroeconomic headwinds, particularly those with exposure to multiple regions and sectors.
6. Rotation Out of Tech Fuels Value Stocks: Utilities and REITs Surge
A notable trend this quarter has been the rotation out of tech stocks and into value sectors, particularly utilities and real estate investment trusts (REITs).
- Utilities have outperformed, with gains of more than 18% since the end of Q2 2024.
- REITs have also seen strong performance, benefiting from expectations of lower borrowing costs as the Fed shifts to a more dovish stance.
This shift highlights a broader rebalancing of portfolios as investors look for dividend yields and defensive plays in sectors with more stable cash flows.
Final Thoughts: Focus on Fundamentals Amidst Market Shifts As we move through Q3 2024 earnings season, it’s clear that the market is in a transitional phase. While AI and healthcare continue to drive growth, consumer fatigue and global macro risks pose challenges for other sectors. Meanwhile, the US elections and potential post-election policy shifts add another layer of complexity to the investing landscape.
For investors, the key is to focus on fundamentals and avoid overreacting to short-term headlines. Maintaining a balanced portfolio with exposure to both growth and value sectors will be critical. Additionally, the coming months could present opportunities for international diversification, particularly if the US dollar weakens post-election.
In summary, patience and discipline will be essential as we navigate the final quarter of 2024 and prepare for what’s shaping up to be an eventful 2025.
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