5 Standout Features Of The Q4 Earnings Season

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The overall picture that has emerged from the Q4 earnings season is one of stability and resilience as a whole, with key pockets starting to enjoy notable acceleration regarding growth momentum.

Earnings aren’t great, but then again, no one expected corporate profitability to be great. The earnings naysayers have been relatively less vocal in their doom-and-gloom pronouncements lately. But the fear of an impending earnings cliff has been in the back of market participants’ minds. These results have likely eased many of those fears.

With quarterly results from about two-thirds of S&P 500 members already out through Friday, February 9th, here are the five key features these quarterly results have confirmed.

First, the Q4 earnings and revenue growth pace represents an acceleration from what we have been seeing in recent quarters.

The absolute level of Q4 earnings and revenue growth isn’t much, and the improving trend may not seem like a big deal to some of you. But we nevertheless see this improving growth trend as significant and a sign of the things to come in the coming periods.

For the 338 S&P 500 members that have reported results through Friday, February 9th, total earnings and revenues are up +5.5% and +3.7% from the same period last year, respectively. Concerning the beats percentages, 80.5% of the companies have beaten EPS estimates, and 65% have beaten revenue estimates.

The comparison charts below put the Q4 earnings and revenue growth rates for these 338 index members in a historical context.

Zacks Investment Research

Image Source: Zacks Investment Research

Second, companies are making good progress on the margins front.

The year-over-year change in net margins turned positive in 2023 Q3 after staying in negative territory for six consecutive quarters. This margins recovery is a key driver of earnings growth in the coming periods.

The chart below shows the year-over-year change in net margins.

Zacks Investment Research

Image Source: Zacks Investment Research

At the sector level, Q4 net margins are above the year level for 9 of the 16 sectors, with the biggest gains at Tech, Consumer Discretionary, Retail, Industrial Products, Utilities, Finance and others.

On the negative side, Q4 margins are below the year-earlier level for 7 of the 16 Zacks sectors, with the biggest declines at the Medical, Autos, Energy and Transportation sectors.

Third, the Tech sector is firmly back in the growth mode now, and the trend is expected to continue going forward.

For the 64.5% of Tech companies in the S&P 500 index that have reported Q4 results already, total earnings are up +21.5% on +6.4% higher revenues, with 86% beating EPS estimates and 72% beating revenue estimates.

Looking at Q4 results for the sector as a whole, combining the results that have come out with estimates for the still-to-come companies, total Tech sector earnings are on track to be up +25.4% from the same period last year on +8.1% higher revenues.

The sector went through a period of post-Covid adjustment in 2022 and the first half of 2023 when it became a drag on the aggregate growth picture.

Please remember that Tech isn’t just any other sector, as it’s the biggest earnings contributor to the S&P 500 index. The sector is currently expected to bring in 28.5% of the index’s total earnings over the coming four-quarter period, with the second and third biggest contributors in Finance and Medical at 17.7% and 12.5%, respectively.

What this means is that the Tech sector’s growth profile has a significant impact on the aggregate picture, both negative as well as positive. The Tech sector dragged down the aggregate growth picture in 2022 and the first half of 2023, now appearing ready to resume its historical positive growth role.

You can see this growth profile in the chart below, which also shows that the sector’s Q4 earnings are on track to reach a new all-time quarterly record of $155.7 billion.

Zacks Investment Research

Image Source: Zacks Investment Research

Please note that the Tech sector is instrumental in keeping the aggregate growth picture in positive territory in Q4. Of the reported results, the +5.5% earnings growth drops to a decline of -0.7% when Technology is excluded from the results.

Fourth, related to the Tech sector’s strong showing is the dominance of the so-called Magnificent 7 companies – Apple (AAPL - Free Report), Amazon (AMZN - Free Report), Alphabet (GOOGL - Free Report), Microsoft (MSFT - Free Report), Meta (META - Free Report), Nvidia (NVDA - Free Report) and Tesla (TSLA - Free Report).

Each of the Mag 7 companies relies on technological innovation to dominate its respective space. But strictly speaking, not all of them are in the Tech sector, as we at Zacks have Amazon as part of the Zacks Retail sector and Tesla as part of the Zacks Auto sector.

Nvidia will report its Q4 results on February 21st, but the rest of the Mag 7 members have already reported results. For Q4 as a whole for the group, combining the actuals that have come out for the six group members with estimates for Nvidia, total Mag 7 earnings are expected to be up +48.7% on +14.5% higher revenues.

The Mag 7 companies are expected to bring in 20% of all S&P 500 earnings in 2024 and currently account for 29.5% of the index’s total market capitalization.

Zacks Investment Research

Image Source: Zacks Investment Research

Please note that S&P 500 earnings growth for Q4 would be in negative territory had it not been for the heavy lifting from Mag 7: -3% vs. +5.4%.

The chart below shows the Mag 7 earnings and revenue growth picture on an annual basis.

Zacks Investment Research

Image Source: Zacks Investment Research

Five, the revisions trend has notably stabilized after appearing to turn substantially negative at the start of 2023 Q4.

Estimates for 2024 Q1 and full-year 2024 are modestly coming down, with negative revisions from some sectors mostly getting offset by positive revisions from others. The chart below shows how the earnings growth expectation for the period has evolved in recent months.

Zacks Investment Research

Image Source: Zacks Investment Research

The chart below shows how the aggregate earnings expectation for full-year 2024 has evolved.

Zacks Investment Research

Image Source: Zacks Investment Research

More By This Author:

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Magnificent 7 Earnings Results Solidify Market Leadership

Disclosure: Zacks.com contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any specific ...

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