April showers bring May flowers. This week we observe 1Q earnings in full bloom, survey the U.S. economic landscape and shine light on an industry which continues to bear fruit.
With roughly 60% of S&P 500 earnings reported, EPS (earnings per share) is tracking 5% ahead of consensus.
EPS and sales beats are better than average with Tech leading the charge (+10% vs. estimates). Tech companies are done cost cutting (layoffs are -64%year over year (y/y) in March) and hyperscaler capex is expected to rise 29%y/y. This suggests non-Tech sectors could see bigger earnings upside in 2H as companies focus more on margins and efficiency. Old economy companies should also benefit from more A.I. investment. Generally, stocks have been rewarded for beats while misses have gotten more penalized than usual. Crowded stocks outperformed less on beats than neglected stocks but underperformed less on misses.
The U.S. economy remains on solid footing despite some moderation in the first quarter. GDP (gross domestic product) growth in 1Q was 1.6% q/q, weaker than what forecasters expected.
The largest drags came from trade and inventories, which are volatile categories and large swings tend to be reversed in subsequent quarters. More noteworthy for the Fed was the upside surprise in core PCE (personal consumption expenditures) inflation (+3.7% quarter over quarter). Spending continues to surge and consumer demand remains resilient. Therefore, our economists think the 1Q24 data is consistent with acceleration in services demand and not indicative of “stagflation” or a negative supply shock. Head of Global Economics Claudio Irigoyen thinks inflation risks remain skewed to the upside given strong demand and tight labor markets. The Fed is unlikely to cut rates until December and higher-for-longer rates is still the path of least resistance. Markets have slowly embraced this view, currently pricing just one 25bp (basis point) cut this year after expecting 150bp of cuts in January.
Defense services companies outperformed the S&P 500 in 1Q.
U.S. Aerospace and Defense Analyst Mariana Perez Mora thinks the “energy trilemma” is another potential catalyst for the group. The energy trilemma – energy security, environmental sustainability, and energy affordability – will be key as A.I. and data centers tax the electric grid.
