Second-quarter earnings season is concluding, giving analysts new data to direct their investments. Morgan Stanley, RBC, and Bank of America recently broke down earnings themes they saw. Tech and consumer discretionary were the winners, while energy and health care enjoyed big pops. The second-quarter earnings season is quickly coming to an end, and it’s time to tally the wins and losses.
While earnings across the market came in better than expected, expectations were lower than investors may have noticed, and many earnings beats didn’t come with the usual same-day pop in share price.
Tech continued its dominant run, but excluding Nvidia, the sector looks weaker than you might think. Meanwhile, consumer discretionary stocks were big winners this quarter, but analysts worry that consumer cash is running out, and it might be a different story in the second half of this year.
Here’s what Wall Street is saying about second-quarter earnings, who the biggest winners and losers were, and what today’s results mean for tomorrow’s market.
Strong results, weak reactionIf you only look at the headlines, you’d be forgiven for thinking that the only company doing anything right this earnings season is Nvidia. And while the chipmaker has certainly cemented itself as the leading horse in the AI race, stocks across the board seemed to enjoy strong results this quarter.
In a mid-August note to clients, Morgan Stanley chief US equity strategist Mike Wilson wrote that with 95% of the S&P 500 reporting, sales across the market were 1.8% higher than anticipated, while earnings per share surprised 7.8% to the upside.
At first blush, this appeared to be good news for investors. But as Wilson noted, earnings estimates for the S&P 500 were actually revised downwards approximately 17% from their 2022 highs and 10% year-to-date before the second quarter reporting period began. And in fact, while sales and EPS figures beat these lowered estimates, earnings were actually down 4% year-over-year, while sales only rose 1% year-over-year.
Perhaps that’s why investors weren’t as enthusiastic about earnings beats as they had been historically. According to Wilson, companies that missed on earnings and sales were punished harder than usual by investors — but even if a company beat earnings estimates, the next-day share price movement was “some of the weakest we have witnessed in the past decade,” he wrote.
Morgan Stanley “Price reaction breadth has been more positive in Comm. Services and Energy while more negative in Tech and Discretionary,” Wilson wrote.
Bank of America analysts also noticed this pattern. In a note from the beginning of August, BofA’s head of US equity and quantitative strategy Savita Subramanian pointed out that reactions to earnings were weak, particularly for growth stocks. Even shares of companies that upped their guidance for next quarter were still down the following day.
Bank of America Second-quarter earnings season winnersSpeaking of growth, tech stocks have been the big winners this year thanks to AI hype, and their earnings reflected this ongoing strength.
“The large cap tech/growth stocks that have carried S&P 500 performance this year have had good earnings amid cost cutting efforts and improving margins,” Wilson wrote. He later added, “this mega cap cohort has delivered stronger than anticipated earnings and has been rewarded handsomely.”
However, Wilson was quick to note that most of these same stocks are down after earnings. Even Nvidia, which posted yet another blowout quarter, sold off shortly after its announcement as investors took their profits and ran.
While tech’s strong quarter wasn’t particularly surprising, consumer discretionary stocks shocked to the upside. Wilson believes that consumer-oriented companies enjoyed the benefits of declining commodity prices, keeping costs low.
Subramanian also noticed the strong results for consumer discretionary stocks, pointing out that they drove the broader market’s results by beating revenue estimates by 3% and earnings estimates by a whopping 20%.
Bank of America While Subramanian noted that this supports the idea that consumer spending is stronger, Wilson cautioned that this hypothesis might be disproven as consumer savings dry up.
“Much of the stability in consumer stocks YTD is related to falling inflation and higher asset prices, in our view,” Wilson wrote. “However, these benefits are now likely priced and if excess savings are finally depleted, then consumer discretionary stocks look vulnerable from our standpoint.”
Lori Calvasina, head of US equity strategy at RBC, also had some thoughts about the earnings season. In a mid-August note to clients, she highlighted tech’s strong results, particularly on EPS forecasts. But she was pleased to see strength in the energy sector, which saw strong price reactions after earnings results, as well as healthcare, which, along with energy, saw positive revisions to 2024 EPS guidance.
Where to invest after earnings seasonWith so much data flooding into markets after earnings seasons, it can be difficult to get a bead on where stocks are headed next — and where investors should be putting their money.
For Calvasina, it’s simple: while the S&P 500 has enjoyed a good run year-to-date, she thinks it’s time the market took a breather.
“Earnings coming in less bad than feared and optimism on a 2024 EPS recovery have been positive catalysts this year,” she wrote. “But what we have seen in 2Q23 reporting season suggests this has largely played out. At the moment, the earnings backdrop simply doesn’t look exciting enough to fend off a pullback in the stock market.”
That said, Calvasina is encouraged by what she sees in energy and healthcare in particular. She remains overweight on both sectors, with energy her top value pick and healthcare her top growth pick.
While Subramanian didn’t make any specific stock recommendations, she did point out that analysts are guiding higher for next quarter in several sectors.
“Our 3-mo. guidance ratio (number of above- vs. below-consensus guidance) jumped to 1.3x, the highest since 2021 and well above the 0.8x historical average,” she wrote. “Guidance has been led by Real Estate and Industrials. The S&P 500 earnings revision ratio (# upward / # downward revisions) improved to 1.0 in July, also led by Real Estate and Industrials.”
As for Wilson, he too didn’t have any specific stock recommendations after earnings season, though he did have some thoughts on investing style going forward.”Our advice remains the same — stay more defensively oriented with a premium on earnings quality, FCF, and operational efficiency,” he wrote. “This is not the same strategy as owning growth, which appears to be more vulnerable than value at the moment given the aforementioned rise in rates.”