As we enter the third quarter (Q3 2024) earnings season with the S&P 500 showing high valuations, the key question in mind is whether the S&P 500 can continue to grow and if the Magnificent Seven can maintain their performance. Let’s delve deeper into these aspects.
1. Earnings Expected to Continue to Grow
Despite market volatility, earnings for the S&P 500 are generally expected to continue growing. According to FactSet, 55% of companies that have provided 3Q earnings guidance have given negative guidance, which is lower than both 5- and 10-year averages. Despite these downward revisions, the S&P 500 is still expected to report a year-over-year (YoY) earnings growth of 4.8% for 3Q, continuing a recent streak of YoY earnings growth.
2. S&P 500 Valuations are High
The S&P 500’s forward price-to-earnings (P/E) ratio stands at 21.4, higher than the 5- and 10-year averages of 19.5 and 18.0, respectively, according to FactSet. The technology sector remains the priciest, with a forward P/E ratio of 28.8, driven by expectations surrounding artificial intelligence. These high valuations leave little room for error for stocks reporting earnings.
3. High Expectations for the Magnificent Seven
The Magnificent Seven continue to drive the market, with positive earnings expectations for 3Q. Nvidia (NASDAQ:NVDA) is expected to lead with nearly 50% YoY earnings growth for Q3. Alphabet (NASDAQ:GOOG) and Meta (NASDAQ:META) are also expected to see significant earnings growth, while Apple’s (NASDAQ:AAPL) growth expectations are more modest at just over 9%. Commentary surrounding the demand for their recently launched iPhone 16 models will be particularly insightful. The Magnificent Seven represent over 30% of the S&P 500, so their performance is crucial.
Despite the high valuations, the S&P 500 is anticipated to continue showcasing earnings growth in Q3. Big tech remains a pivotal driver of this growth, reinforcing the market’s resilience. However, these valuations could pose challenges, potentially weighing on stocks even if earnings reports are favorable. Nevertheless, the overall outlook for Q3 earnings remains optimistic, with expectations that the market will ultimately maintain its upward trajectory and sustained earnings growth.
Disclaimer: ProsperUs Head of Content & Investment Lead Billy Toh doesn’t own shares of any companies mentioned.
