Equity Monthly Review: May 2024

Equity Monthly Review: May 2024
Horacio Coutino, Equities investment writer

Q1 Earnings in focus

As the Q1 2024 earnings season comes to conclusion, S&P 500 companies continue to demonstrate strong performance relative to expectations. Both the proportion of companies reporting positive earnings surprises and the magnitude of these surprises exceed their 10-year averages. The S&P 500 is currently exhibiting its highest earnings y/o/y growth rate since the second quarter of 2022.

To date, 98% of S&P 500 companies have reported their actual Q1 2024 results, with 78% surpassing EPS estimates. This figure exceeds both the 5-year average of 77% and the 10-year average of 74%.

The blended earnings growth rate for the first quarter currently stands at 5.9%, a notable increase from the 3.4% growth rate reported at the end of the quarter (31 March). If this 5.9% figure holds, it will represent the index's highest y/o/y earnings growth since Q1 2022, when it was 9.4%.

Since 31st March, companies have been reporting earnings 7.4% above expectations. This surprise percentage surpasses the 1-year average (+6.4%) and 10-year average (+6.7%), although it remains below the 5-year average (+8.5%). The Communication services sector (+12.5%) leads in positive aggregate difference between actual and estimated earnings, followed by Consumer Discretionary (+10.9%) and Utilities (+8.9%).

On the revenue front, 61% of S&P 500 companies have reported actual revenues above estimates, falling slightly below the 5-year (69%) and 10-year (64%) averages. In aggregate, companies are reporting revenues 0.8% above estimates, significantly lower than the 5-year average of 2.0% and the 10-year average of 1.4%.

Positive revenue surprises from companies within the Financials sector have been the primary driver of the index's increased revenue growth rate since 31 March contributing +3.7%. Conversely, the Utilities sector experienced the largest negative difference between actual and estimated revenues, at -5.3%. Overall, the blended revenue growth rate for the first quarter is currently 4.2%, compared to 3.5% at the end of the quarter.

The forward 12-month price-to-earnings (P/E) ratio is 20.3, surpassing both the 5-year average (19.2) and 10-year average (17.8). However, this figure remains below the 21.0 recorded at the end of the first quarter.

Seven S&P 500 companies are scheduled to report their first-quarter results this week.

S&P 500 Earnings Growth: 5.9%

Eight of the eleven sectors have reported or are projected to report y/o/y earnings growth for Q1 2024. The Communication Services, Utilities, Information Technology, and Consumer Discretionary sectors lead this growth. Conversely, the Energy, Health Care, and Materials sectors have recorded a y/o/y decline in earnings.

The Communication Services sector stands out with the highest y/o/y earnings growth rate among all sectors, at 33.9%. Alphabet and Meta Platforms have significantly contributed to this growth, with earnings per share (EPS) of $1.89 (versus $1.17) and $4.71 (versus $2.20), respectively. Without these two companies, the sector's blended y/o/y earnings growth rate would drop to 1.8%.

The Utilities sector closely follows with the second-highest growth rate at 31.5%. Within this sector, the Electric utilities industry has played a crucial role, contributing 55% y/o/y growth. Excluding this industry would reduce the sector's overall growth rate to 4.9%.

The Information Technology sector reports the third-highest y/o/y earnings growth rate at 25.2%. Nvidia ($6.12 vs. $1.09) stands out as the largest contributor to the sector's growth, and its exclusion would lower the blended y/o/y earnings growth rate to 11.2%. Furthermore, Nvidia's impact extends to the entire S&P 500, as its exclusion would reduce the index's blended earnings growth rate to 3.3% from 5.9%.

The Consumer Discretionary sector follows with a growth rate of 24.9%, largely attributed to Amazon's EPS of $0.98, a significant increase from the previous year's $0.31. Excluding Amazon would lead to a substantial reduction in the sector's growth rate to 2.8%.

The Energy sector experienced the most substantial y/o/y earnings decline of all sectors, at -25.5%. This is primarily due to decreases in four of its five sub-industries: Oil & Gas Refining & Marketing (-61%), Integrated Oil & Gas (-27%), Oil & Gas Exploration & Production (-9%), and Oil & Gas Storage & Transportation (-1%). The Oil & Gas Equipment & Services sub-industry is the only one in the sector to report positive y/o/y earnings growth, at +19%.

The Health Care sector faced the second-largest decline at -25.4%, primarily due to Bristol Myers Squibb's negative EPS of -$4.40 compared to $2.05 in the previous year. Excluding this company would improve the sector's earnings decline to -6.9%. Bristol Myers Squibb is the largest detractor to earnings growth for the entire S&P 500; excluding it would boost the index's growth rate to +8.9%.

The Materials sector was -20.6% in Q1, with all four industries within the sector reporting y/o/y earnings declines exceeding 10%.

Within the Financials sector, positive EPS surprises from Berkshire Hathaway, Goldman Sachs, JPMorgan Chase, and Morgan Stanley have significantly contributed to the index's earnings growth since 31 March. Consequently, the blended earnings growth rate for the Financials sector improved from +1.7% to +7.7% during this period.

S&P 500 Net Profit margin: 11.7%

The blended net profit margin for the S&P 500 in Q1 2024 reached +11.7%, surpassing the previous quarter's net profit margin of +11.2%, the 5-year average of +11.5%, and the year-ago net profit margin of +11.6%.

Sector-specific analysis reveals that eight sectors experienced a year-over-year increase in their net profit margins in Q1 2024 compared to Q1 2023. Leading this growth were the Utilities (14.7% vs. 10.3%), Information Technology (25.9% vs. 22.4%), and Communication Services (13.5% vs. 10.9%) sectors. Conversely, three sectors reported year-over-year declines in their net profit margins: Energy (9.6% vs. 12.5%), Health Care (6.5% vs. 9.3%), and Materials (9.4% vs. 11.2%).

Furthermore, eight sectors reported Q1 2024 net profit margins exceeding their 5-year averages, with the Information Technology (25.9% vs. 23.4%) and Communication Services (13.5% vs. 11.5%) sectors demonstrating the most significant increases. In contrast, three sectors reported Q1 2024 net profit margins below their 5-year averages, most notably the Health Care (6.5% vs. 10.0%) and Materials (9.4% vs. 10.9%) sectors.

The S&P 500 reaction to earnings

To date, the market is rewarding positive earnings surprises reported by S&P 500 companies less than average while punishing negative earnings surprises reported by S&P 500 companies more than average. 

Companies exceeding earnings expectations have seen an average price increase of +0.8% in the two-day window preceding and following the earnings release. This is a lower favourable reaction than the 5-year average price increase of +1.0% observed during this timeframe for companies with positive surprises.

Conversely, companies undershooting earnings expectations have experienced an amplified negative response. On average, their shares prices were -2.8% in the two-day window surrounding the earnings release. This is larger than the 5-year average of -2.3% witnessed for companies with negative surprises.

The S&P 500 is +3.19% since this earnings season began on 12th April.

How have Q2 EPS estimates changed?

Analysts have not lowered their earnings per share (EPS) estimates for S&P 500 companies for the second quarter of 2024 despite signs of economic slowdown. Instead, aggregate EPS estimates for Q2 were +0.3% from 31 March to 30 May, reaching $59.43 from $59.22.

This contrasts with the historical trend, where the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.8% and 2.7% over the past five and ten years, respectively. The second quarter of 2024 marks only the second instance since Q3 2021 where the bottom-up EPS estimate has increased during this period.

At the sector level, five of the eleven sectors saw an increase in their bottom-up EPS estimate for Q2 2024 from 31 March 31 to 30 May, with Energy leading at +6.2%. Conversely, six sectors experienced a decrease, led by Industrials with a decline of -4.3%.

Additionally, while April witnessed an increase in aggregate EPS estimates for Q2 2024, rising to $59.63 from $59.22, this trend reversed in May, with estimates decreasing to $59.43 from $59.63.

Global backdrop

May witnessed positive performance across all major global equity indices, primarily propelled by growth in the technology and telecommunications sectors. Robust earnings reports, continued enthusiasm for the potential of artificial intelligence (AI), and indicators of economic resilience have contributed to this upswing. This was despite investors revising their expectations regarding the number and timing of potential interest rate cuts this year.

  • According to the CME FedWatch tool, interest rate swaps have now priced in a 47.9% probability that the Fed rate will remain in the target range of 5-5.25% at its 18th September meeting. This contrasts with 1st May pricing which assigned a 46.05% probability to the same Fed rate on that date.
  • Yields have been volatile in May. The US 10-year yield was -18.5 basis points (bps) to 4.502%, while the 10-year German Bund was +8.4 bps to 2.671%. The spread between the two was 183.1 basis points. This was 26.9 basis points lower than it was at the beginning of May.
  • The US dollar weakened in May. The US Dollar Index, at 104.67,  was -1.45%, while the YTD performance by 31 May was +3.29%. The euro was +1.62% against the dollar, while Sterling was +1.99% in May.

Regional breakdown


S&P 500 +4.80% MTD +10.64% YTD
Nasdaq 100 +6.28% MTD +10.17% YTD
Dow Jones +2.30% MTD +2.64% YTD
Russell 1000 +4.56% MTD +9.94% YTD

Note: As of 5pm EDT 31 May 2024.

With the exception of the Energy sector, all other S&P 500 sectors have experienced positive performance in May. The Information Technology sector led the index's performance in May, +9.95%, followed by the Utilities sector at +8.46% and Communication Services +6.56%.

In contrast, the equal-weighted version of the S&P 500 has underperformed the benchmark by 5.89 percentage points YTD, yielding a 4.75% return compared to the S&P 500's 10.64%. This underperformance is further evident in the May results, with the equal-weighted version achieving a 2.63% return compared to the S&P 500's 4.80%.

An analysis of the past five years (60 months) demonstrates that the May performance of major US stock indices—the S&P 500, Nasdaq 100, Dow Jones Industrial Average, and Russell 1000—has been strong. The S&P 500 and Nasdaq 100's May performance ranks at the 76.2nd percentile, signifying that only 14 out of the past 60 months have witnessed superior performance. The Dow Jones Industrial Average's May performance of 2.30% ranks at its 61.0th percentile. Meanwhile, the Russell 1000's performance ranks at the 72.8th percentile, indicating that only 16 months out of the past 60 have seen a higher return than its current 4.56%.

Magnificent Seven dominance raises questions about market concentration risk. More than half of the S&P 500's 4.80% gain in May can be attributed to Nvidia (+26.89%), Apple (+13.02%), Alphabet (+5.97%), and Microsoft (+6.82%).

However, as noted by Bank of America (BoA) analysts, equity breadth has reached its worst level since March 2009 when comparing the equal-weight S&P 500 to the cap-weighted S&P 500. BoA argues that the AI trade is crowding out the broader market. Despite the S&P's being +10.64% by the end of May, the proportion of companies trading below their 50-day moving average has decreased to approximately 40% from around 90% at the beginning of the year.

The extended positioning in the Magnificent Seven group also poses a risk, with Goldman Sachs noting that these companies now constitute a record 20.7% of hedge fund exposure to US single stocks. Bespoke Investment Group further observed that breadth has weakened in absolute terms recently, with a net 83% of stocks declining daily over the past ten days.

However, narrow breadth often leads to mean reversion, which can help the broader market catch up. The near-term EPS growth estimates are almost entirely driven by the Magnificent Seven.


Stoxx Europe 600 +2.63% MTD +8.18% YTD
Germany DAX +3.16% MTD +10.42% YTD
FTSE 100 +1.61% MTD +7.01% YTD
France CAC 40 +0.10% MTD +5.96% YTD
Spain IBEX 35 +4.31% MTD +12.08% YTD
MSCI Europe +2.32% MTD +8.11% YTD

In May, the Stoxx Europe 600 displayed a nuanced performance across its sectors. The Telecom sector emerged as the frontrunner, +5.57%, followed by Industrial Goods and Services +4.38% and Insurance at +4.23%.

Conversely, the Oil & Gas sector was -0.94%. This negative performance may be attributed to concerns regarding subdued demand, and increasing supply from non OPEC countries.

A comparative analysis of the Stoxx Europe 600 Equal Weight (EW) index reveals a contrasting picture. The EW index, which assigns equal weight to each constituent company, posted a 3.56% return in May, outperforming the standard Stoxx Europe 600's 2.63%. Moreover, its YTD performance stands at +6.31%, only 1.87 percentage points lower than the European benchmark. This suggests a more evenly distributed increase across companies within the EW index, whereas the main index may be disproportionately influenced by the performance of large-cap companies.

An analysis of European equity index performance over the past five years (60 months) reveals comparable results to their American counterparts in May 2024.

The Stoxx Europe 600's May performance ranks at the 69.4th percentile, indicating that only 18 months within this timeframe have yielded higher returns. Spain's IBEX 35 demonstrated the strongest performance at 4.31%, placing it at the 81.3rd percentile.

Germany's DAX and the UK's FTSE 100 resided above the 60th percentile, at 67.7% and 61.0%, respectively by 31 May. This implies that only 19 and 23 of the past 60 months have seen stronger performance than May 2024 for these indices.

Among European indices, the CAC 40 exhibited the weakest performance, positioned at the 43.3rd percentile. This signifies that 34 out of the past 60 months have witnessed stronger performance for the CAC 40.

Points for investor consideration: IPOs, M&A, and the impact of T+1

Revival and Resilience: Europe’s IPO Landscape. 

As noted by Morningstar, the Initial Public Offering (IPO) market had the most robust start to a year since the 2021 peak with IPOs by Galderma, Douglas AG, Puig and CVC and others Within the European IPO market, consulting company PwC states that 13 IPOs raised €4.8 billion in Q1 2024. Private equity-backed IPOs have been instrumental in this revival, accounting for three of the top five IPOs in the region. While consumer and luxury sectors have exhibited particular strength, the pipeline remains diversified across various industries.

This positive shift in sentiment, emerging towards the end of 2023, is attributable to multiple factors. The stabilisation of the macroeconomic landscape has been crucial. Resilient European economic growth, supported by declining energy prices and a rebound in global manufacturing activity, coupled with falling inflation, has indicated up to three cuts by the ECB this year. This, in turn, has bolstered investor confidence and pushed the pan European STOXX Europe 600 to an all-time high this year.

The resultant positive outlook has invigorated investor confidence, establishing the essential prerequisites for a thriving IPO market. Combined with a backlog of demand for exits, this has created a window of opportunity for issuers and sellers to assess market receptivity.

While macroeconomic headwinds and rising interest rates have significantly reshaped the private equity (PE) exit landscape since 2021, resulting in a considerable backlog of maturing PE investments totaling over $5 trillion globally (according to PitchBook data), the recent stabilisation of equity capital markets presents a viable pathway for further PE-backed IPOs.

This year may also prove to be pivotal for the London IPO market, characterised by a gradually improving outlook and substantial ongoing changes to the UK listing regime. These reforms aim to enhance the attractiveness of the London market for listings and cultivate a more favourable environment for companies considering going public. They have reduced the minimum public float requirement from 25% to 10% and permitted certain dual-class listings on the premium segment of the market. These changes are anticipated to facilitate major acquisitions without necessitating shareholder approval, thereby attracting increasing interest from both domestic and international companies exploring a London listing. A prime example is National Grid's ambitious plan to raise £6.8 billion, the UK's most substantial equity deal in over a decade.

The US dominates the global M&A landscape in Q1 2024.

According to LSEG data, in Q1 2024, US-targeted companies accounted for a significant 61% of global mergers and acquisitions (M&A), a level of US dominance not seen since 1989. US deal values surged 78% compared to the same period in 2023, reaching $484 billion, the highest aggregate value in three years. US targets featured in 14 of the 15 largest transactions during the quarter. According to consulting firm EY Parthenon, Q1 2024 saw a 36% increase in global deal value. The global law firm, Linklaters, suggests that Global public M&A reached $361bn in the first quarter of this year – the highest deal value the market has seen since Q2 in 2022 where it topped $511bn.

The recovery was further characterised by a preference for mega-deals valued at $10 billion or more, which doubled y/o/y to $278 billion. Conversely, mid-market deals (valued at $500 million or less) experienced a decline in both value and volume compared to the first quarter of 2023. 

A key question arises: does the surge in US large-cap deals merely represent companies seizing a period of relative stability before potential election-related uncertainties, or does it signal a genuine recovery with wider international and domestic implications?

One encouraging sign is the 13% increase in M&A activity by Private Equity firms compared to Q1 2023, M&A activity reached $154 billion globally. Buyout groups now represent 19% of the M&A market, a historically high share, although slightly below the peak levels observed in recent years. In addition, the EY-Parthenon Deal Barometer estimates corporate US M&A deal volume will rise 20% in 2024, following a 17% contraction in 2023. This would represent a return to near pre-pandemic levels of activity with the number of deals in 2024 only about 4% below the average number of deals in 2017–19.

As noted by LSEG, Europe's M&A landscape is also showing signs of recovery, with deal values reaching $142 billion in Q1, a substantial 58% increase y/o/y. In contrast, Asia-Pacific experienced a 28% decline in M&A to $105 billion, the slowest opening quarter since 2013. However, performance within the region is divided, with China's M&A activity falling 37% year-on-year, while India's rose by 48%. Emerging markets globally faced a challenging start to the year, with M&A activity down 10% in Q1 to a 15-year low of $119 billion.

Despite a 37% increase in technology sector M&A, the Energy and Power sector emerged as the leader, experiencing an 80% increase in deal values to $146 billion, driven by US domestic energy policy. Financial sector M&A also rebounded, rising 72% to $105 billion, including the year's largest deal to date: Capital One's acquisition of Discover Financial Services for $35 billion.

Investment banking fees mirrored the polarised market, increasing 15% in the Americas, remaining flat in EMEA, and declining elsewhere. In the global M&A rankings for the first quarter of 2024, Goldman Sachs reclaimed the top spot from JP Morgan, with both exceeding $200 billion in deal values, accounting for half the global market. Morgan Stanley recovered from a challenging start in 2023 to secure third place, while Evercore re-entered the top 10 as the world's fourth most active financial advisor.

Wall Street accelerates settlement to T+1 

The US stock market has reverted to a settlement speed last seen a century ago, with share trades in New York now settling within a single day under new Securities and Exchange Commission rules, which came into effect from Tuesday, 28th May. This change halves the time required to complete each transaction.

The transition to the T+1 system aims to mitigate financial system risk. The shift to a single day presents unique challenges due to the market's current size and scale, the complexity of cross-border investments, and the fact that the US is moving ahead of many other jurisdictions. Notably, the traditional two-day settlement period for currency trades necessitates faster sourcing of dollars by international investors funding US securities transactions. In practice, a key industry deadline leaves investors with limited time to acquire the necessary funds, coinciding with a period of low liquidity. This change is expected to increase liquidity requirements towards the end of the FX trading day and shortly after, between 3 pm and 7 pm in New York. The net effect of these end-of-day flows will be crucial for liquidity. While some foreign exchange costs may rise due to increased trading outside of normal hours, the industry is anticipated to adapt relatively quickly.

While the hope is for a seamless transition, the SEC has acknowledged the possibility of a temporary increase in settlement failures and challenges. The Securities Industry and Financial Markets Association, a leading industry group, has established a "T+1 Command Center" to proactively identify and address any arising issues.

Things to look out for in H2 2024

S&P 500 companies have exhibited remarkable resilience during the Q1 2024 earnings season. This resilience is evident in their ability to consistently surpass earnings expectations, with a majority of companies reporting positive surprises. The Communication Services sector spearheaded this growth, largely attributed to stellar performances by industry giants Alphabet and Meta Platforms.

The blended net profit margin for the S&P 500 reached 11.7%, exceeding previous quarter, 5-year average, and year-ago figures. The blended earnings growth rate for the S&P 500 marked the highest year-over-year growth since Q1 2022. The market's reaction to earnings was muted for positive surprises and amplified for negative ones compared to 5-year averages.

The dominant performance of the Magnificent Seven raises concerns about market concentration risk. These companies contributed over half of the index's 4.80% gain in May and now constitute a record 20.7% of hedge fund exposure to US single stocks.

In the second half of 2024, economic growth is anticipated to decelerate due to the broader impact of prior monetary policy adjustments. Consumer spending, a significant component of GDP, is projected to increase at a more restrained rate in the latter half of 2024, a trend already hinted at by the Q1 GDP and CPI figures.

The Fed is expected to maintain its current stance on interest rates, holding the Fed Funds rate steady at 5.25%-5.5% until at least September and possibly not even cutting rates at all this year.

Inflationary pressures are easing but are expected to remain above the Fed's 2% target throughout the latter half of 2024. Core PCE prices, the Fed's preferred inflation gauge, are forecast to continue moderate in H2 but are still high, remaining between 2.8% and 2.9%, and surpassing the Fed's 2% target. However, it’s not clear that inflation will continue to moderate at a pace quick enough to result in a normalisation of policy rates by the end of the year. Additionally, any significant changes to quantitative tightening, such as the Fed's balance sheet runoff program, will be closely monitored through the second half of 2024.

Several factors suggest that US consumer spending growth will taper off in H2 2024 including reduced excess savings, stabilising wage gains, low savings rates, and diminished pent-up demand. Despite these headwinds, a tight labour market is likely to sustain employment and income levels, although at a slower pace of growth than seen in 2023.

While supply chain bottlenecks have largely receded, global supply chain restructuring efforts will persist, albeit gradually. Recent legislative incentives, such as the CHIPS and Science Act and Inflation Reduction Act, have encouraged strategic industries like semiconductors and renewables to bring production onshore, resulting in increased investment in high-tech manufacturing facilities. However, widespread supply chain adjustments will continue at a measured pace due to the complexities and costs involved.

Geopolitical risks remain a key concern heading into the latter half of 2024. Elevated trade tensions with China, the ongoing conflict between Russia and Ukraine, and instability in the Middle East all contribute to uncertainties and risks. The US presidential election on 5th November, 2024 could have significant geopolitical impact.

In Europe, the European Parliament Election, scheduled for 6th to 9th June, will shape the policy direction of the European Union. Major issues like economic recovery, energy policy, the ongoing invasion of Russia in Ukraine and migration will be on the agenda, influencing the future trajectory of the EU and its member states.

The UK Election, set for 4th July, 2024, will focus on critical themes such as the cost of living, immigration, and asylum, shaping the political landscape in the country.

Finally, Brazil's general election, encompassing presidential, congressional, and gubernatorial contests, is expected to occur on 6th October, 2024, with implications for the country's political and economic future.

All of these myriad factors will need to be on investors radars as they rebalance their portfolios in the months ahead.

While every effort has been made to verify the accuracy of this information, EXT Ltd. (hereafter known as “EXANTE”) cannot accept any responsibility or liability for reliance by any person on this publication or any of the information, opinions, or conclusions contained in this publication. The findings and views expressed in this publication do not necessarily reflect the views of EXANTE. Any action taken upon the information contained in this publication is strictly at your own risk. EXANTE will not be liable for any loss or damage in connection with this publication.

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