Earnings Update, Looking For Growth

Q4 Earnings Update: A Comprehensive Overview

The fourth quarter of 2024 has seen a significant portion of companies across various market capitalizations report their earnings, with approximately three-fourths of large-cap, two-thirds of mid-cap, and half of small-cap companies having shared their results. While the broader stock market has experienced some volatility, the overall earnings season has unfolded in a relatively standard manner. Companies that reported profits demonstrated mid-single-digit revenue growth and double-digit earnings growth, slightly exceeding initial expectations but not by a wide margin. This modest outperformance is reflected in Figure 1, which highlights the median results for the quarter.

Earnings Surprises: A Mixed Bag

The earnings surprise data, illustrated in Figure 2, shows that 75% of S&P 500 large-cap companies, 75% of S&P 400 mid-cap companies, and 66% of S&P 600 small-cap companies exceeded consensus earnings estimates. These figures align with recent historical trends, indicating no significant deviation from what has been observed in previous quarters. However, the reactions to these earnings reports have been varied, with just under half of the stocks in each capitalization group trading upward post-earnings. This lackluster reaction is not unusual for earnings season, as markets often price in expectations ahead of official reports.

Looking Ahead to 2025: Elevated Valuations and Cautious Guidance

As investors shift their focus to 2025, the expectations across large-cap, mid-cap, and small-cap companies reveal a slight majority experiencing downward earnings revisions. This trend is common at the start of a new calendar year, as companies often provide conservative guidance to set a low bar for performance. However, against the backdrop of a U.S. stock market trading at a high price-to-earnings ratio of approximately 25x 2025 estimates, there is pressure on companies to deliver robust earnings growth. Investors are clearly betting on a strong rebound in corporate profitability next year, but the current valuation levels suggest that the market is pricing in optimism.

Earnings Reactions: Winners and Losers

The reactions to earnings results have been mixed, with the median stock posting a 5% gain if it reported a positive earnings surprise and a 5% decline if it disappointed. These moves are consistent with recent norms, suggesting that markets are behaving predictably in response to earnings news. Notably, a few standout performers saw their stock prices surge by at least 20%, including large-caps such as Netflix (NFLX), T-Mobile US (TMUS), and Palantir Technologies (PLTR). On the flip side, companies like Deckers Outdoor (DECK) and Constellation Brands (STZ) experienced significant declines of 20% or more, reflecting poor receptions to their results.

Identifying Growth Opportunities: A Stringent Screen

For growth investors, the data offers a valuable starting point to identify companies with strong momentum. A tight screen of stocks from all three S&P universes reveals only 32 out of over 860 companies that meet stringent criteria, including positive earnings reactions, strong sales and earnings growth in Q4, and favorable 2025 estimates. Standout industry groups include Aerospace/Defense, Software, and Regional Banks, among others. These companies demonstrate both fundamental and technical strength, making them compelling candidates for further research. Conversely, a separate screen identifies stocks with weak fundamentals that reacted poorly to earnings, potentially signaling short-term underperformance.

Conclusion and Contributions

The Q4 earnings season has provided valuable insights into corporate performance and market expectations. While the results were largely in line with expectations, the mixed reactions highlight the importance of company-specific fundamentals in driving stock performance. The high valuations in the U.S. market underscore the need for sustained earnings growth in 2025, and the stringent screens provided here offer a useful framework for identifying potential winners and losers. Contributions to this analysis were made by Kenley Scott, Director and Global Sector Strategist at William O’Neil + Company, alongside the firm’s research analysts. As always, investors are reminded to consider multiple factors before making investment decisions, as past performance is not indicative of future results.