Earnings Growth Turns Positive Across the Globe

Key Takeaways

Global earnings growth was positive in the second quarter amid a stabilizing economic backdrop. Inflation remained above target, but a reading on global manufacturing showed that activity was picking up at the fastest pace since April 2022.¹ On the other hand, the health of consumer demand remains a concern due to higher prices, weakening employment conditions and the depletion of excess savings.

The reporting period opened with analysts predicting that Europe’s profit picture would improve but remain in the red. However, results came in better than expected, and eurozone companies reported their first quarter of positive year-over-year earnings growth in more than a year.

Other earnings highlights from around the globe are highlighted below.

• S&P 500^® Index companies posted their fourth consecutive quarter of positive earnings growth and their highest growth rate since Q4 2021 at 10.9%.² Utilities and information technology companies posted the strongest results, while materials and industrials were the weakest.

• Earnings growth was surprisingly strong in Europe at 4.1%, ahead of consensus estimates.³ The improvement came despite the negative impact of China’s economic slowdown on European exporters.

• Profit growth slowed in Japan but remained positive at 3.3%.⁴ The information technology sector produced strong results, benefiting from government policy aimed at digitizing Japan’s economy.

• The information technology and materials sectors helped drive earnings growth in emerging markets. EMEA earnings came in above expectations, while LatAm lagged. EM Asia beat forecasts, though China continued to drag on earnings growth.

Five Trends We’re Watching

1. AI, Reshoring and EVs Drive Utilities Sector Profit Growth

While often considered a sleepy area of the equity market, the utilities sector showed the highest earnings growth in the S&P 500 in the second quarter.

The sector's leadership is notable, considering that the rate of growth in U.S. electricity generation has been declining steadily since the 1950s. Factors contributing to this decline include slowing population growth, more energy-efficient appliances and a plateau in the growth rate for introducing electricity-consuming products.

More recently, themes such as artificial intelligence (AI), reshoring and electric vehicles (EVs) have triggered an inflection in energy demand that many predict will continue in the coming years. We expect AI to be particularly impactful. For example, ChatGPT consumes more power in a single day than a three-bedroom home uses in an entire year.⁵

As shown in Figure 1, forecasters expect electricity net generation growth to increase by 3.2% in 2024, which is higher than the average over the past 45 years.

2. Consumer Spending Trends Show Mixed Signals

After years of absorbing higher prices without much pushback, many consumers may have finally had enough. Consumer-facing companies reported heightened pressure on their low-income customers, softness in discretionary and big-ticket purchases and signs that the slowdown is spreading to areas such as travel and lodging.

At the same time, Walmart and Target are benefiting as consumers shift to stores where they feel they’re getting better value. For example, Walmart reported that upper-income households led its share gains compared to other income cohorts. Overall, they didn’t see a deterioration in monthly results and aren’t detecting broad weakness in consumers' appetites.

Similarly, Target experienced growth in same-store sales. Their earnings reflected continued strong performance in the beauty category and improved discretionary sales, especially in apparel. The management team believes consumers are still willing and able to spend, but they’re budget-conscious and looking for deals and everyday values.

3. China’s Economic Slowdown Impacts European Earnings

The prolonged property slump, a lack of government stimulus and high unemployment, particularly among youth, are hurting consumption trends in China. Consumers are pivoting away from big-ticket, discretionary purchases toward discounters and day-to-day basics.

Due to these headwinds and structural overcapacity, deflationary trends have set in. This is weighing on businesses catering to Chinese consumers, including Europe-based companies that target China as a key end market. Subdued consumer appetites affect a range of companies, including European car manufacturers and makers of luxury goods.

4. Magnificent Seven Companies Skewing S&P 500 Earnings Growth and Valuations

As in 2020 and 2023, the Magnificent Seven – the seven largest companies in the S&P 500 – continued to drive essentially all the earnings growth in the second quarter. The combined profit growth for these seven stocks was up 34%, while the aggregate growth rate for the other 493 companies was only 6%.⁶

As we discussed last quarter, the tide may be set to turn. Forecasts for the remaining two quarters of 2024 indicate an expected narrowing of the earnings growth gap between the Mag 7 and the rest of the S&P 500.

Strong earnings growth has led to significant stock price appreciation for the Mag 7 relative to the broader market. As a group, their 12-month forward P/E multiple broke away from the other 493 stocks in 2014 and remains elevated today. See Figure 2. However, the relative valuations are below the 2020 peak as companies have somewhat “grown into” their lofty valuations. The valuations for the rest of the pack are much closer to the S&P 500’s historical average.

5. AI Adoption Continues to Drive Earnings Growth

The entire AI value chain has become a material contributor to growth for many companies. Integrating AI models into new products and services opens new market opportunities for companies and drives additional productivity improvement for customers. Additionally, data center capacity and electrical infrastructure are key themes here.

The Earnings Outlook Is Mixed

Forecasts call for S&P 500 earnings to rise 5.2% in the third quarter and climb to 15.5% in the fourth quarter.⁷ Analysts expect input costs to continue to normalize, making comparisons to 2023 easier. Full-year estimates call for U.S. profits to grow 10.1% in 2024 and 15.3% in 2025.⁸

In non-U.S. developed markets, persistently high interest rates are driving a more visible slowdown in growth, particularly in cyclical areas of the economy. These headwinds may result in a downward resetting of earnings expectations. Weaker macro data and recession concerns have also pushed out expectations for an earnings recovery into 2025.