With Q2 earnings season winding down and more certainty surrounding monetary policy, analysts and investors have been updating their year-end projections while looking ahead to 2025. For many, Nvidia earnings last week marked the unofficial end of earnings season, with the company delivering strong Q2 results that surpassed revenue and earnings expectations. However, weaker-than-expected forward guidance put pressure on the stock, raising concerns that the outlook marks a turning point for the explosive growth of Artificial Intelligence and the broader U.S. tech sector. Offsetting the sentiment, a broadening of US earnings growth has set a floor for continued economic expansion as more companies participate in the rally.
Supporting the soft-landing narrative, the Bureau of Economic Analysis released the second reading of Q2 GDP that showed growth re-accelerating. On the inflation front, the Commerce Department reported that the personal consumption expenditures (PCE) price index rose 0.2% last month and was up 2.5% from the same period a year ago—in line with estimates. Of note, the three-month annualized PCE advanced 1.7%, further supporting a September rate cut. The positive news flow pushed equity markets higher for the week. The S&P 500 Index closed higher by 0.3%, with August posting a robust 2.4% gain. The Index has only seen one negative month since late last year, translating into a 19.5% gain so far in 2024. Across fixed income, the US Aggregate Bond Index fell 0.5% last week, but August posted a solid 1.4% gain.
Quarterly Earnings Mentions of Recession
Source: Bloomberg.
With the broadening of economic growth and strong real consumption, earnings season shaped up to provide a strong backdrop for the corporate sector. There were a few weak spots in Q2 earnings, but the 493 stocks in the S&P 500 (excluding the Magnificent Seven) more than doubled EPS growth forecasts, helping push the equal-weight S&P 500 Index to all-time highs. According to Bloomberg Intelligence, the Index is set to report 14.0% quarterly earnings growth, topping analyst expectations for 8.3% while revenues are set to grow 5.8%, above expectations for 4.6%. Exhibiting the broad-based strength, industrials, real estate, and staples saw modest growth rather than forecasted declines. Highlighting the positive sentiment, recession mentions on quarterly update calls have fallen to a three-year low from elevated levels in 2022, when one of the most widely anticipated recessions in history never came.
US GDP Revised Higher with Consumer Strength
US GDP vs US PCE
Source: Bureau of Economic Analysis.
Helping bolster the corporate sector, Q2 GDP growth accelerated as strong consumption trends more than offset weak activity in other categories. Gross domestic product rose at a 3.0% annualized rate in Q2, up from the previous estimate of 2.8%. The economy’s main growth engine—personal spending—advanced 2.9%, versus the prior estimate of 2.3%. The other main gauge of economic activity—gross domestic income (GDI)—rose 1.3% and in line with the first quarterly estimate. GDI measures net income generated, whereas GDP measures spending. The concern is future GDP (spending) will be constrained by lower income generated. Or, said differently, the gap between GDP and GDI suggests current consumption is being fueled by savings and credit.
US Consumer Confidence Rises to Six-Month High
Source: University of Michigan, Conference Board.
Helping drive economic activity is a consumer that is starting to feel better about the current environment. While soft data (such as surveys) can always be subject to the whims of emotion, recent developments on monetary policy, disinflation, politics, and other socioeconomic influences have lifted consumer sentiment. At the same time, confidence remains well shy of pre-pandemic levels due to a higher absolute living costs and a moderating job market.