The second quarter of 2024 brought a significant change to the S&P 500 earnings landscape. While companies continue to beat earnings estimates at a higher rate than average, the market is now reacting more strongly to those positive EPS surprises than in the past. Conversely, companies failing to meet earnings expectations are facing harsher consequences, experiencing steeper stock declines.
This new trend suggests a subtle shift in investor behavior. While the market initially welcomed recent rate cuts, the increased emphasis on EPS surprises indicates investors may be becoming more cautious about the potential for revenue growth to decelerate. As companies are increasingly challenged to meet lofty revenue expectations, the market appears to be prioritizing profitability over top-line performance.
This quarter saw 82% of S&P 500 companies beat earnings estimates, surpassing the five-year average of 77%. However, the percentage of companies exceeding revenue estimates dipped to 63%, lower than the average of 69%. This disparity highlights the growing importance of profitability in the eyes of investors.
The market’s heightened sensitivity to EPS surprises is further emphasized by the fact that companies exceeding estimates saw an average share price increase of 2.7% on the day of their earnings release, while those missing estimates experienced a decline of 2.5%. This pattern extends over a five-day period, with stocks beating estimates rising by 3.5% and those missing estimates dropping by 3.2%.
While EPS growth is currently exceeding historical averages, this trend may not be sustainable. The market is likely to increasingly scrutinize revenue performance as the year progresses. The current focus on EPS suggests that rate cuts alone may not be enough to fuel optimism if revenue growth fails to meet the elevated expectations of investors.
This shift in market sentiment presents a unique challenge for companies entering the second half of the year. While beating earnings estimates is important, investors are now looking for more than just top-line growth. Companies will need to demonstrate strong profitability alongside consistent revenue performance to garner investor confidence and maintain a positive market response.
