 | Horacio Coutino, multi-asset strategist |
Global backdrop in September
Major global equity indices had largely diverging performances in September. While European equity indices experienced a general decline prior to the Federal Reserve’s rate cut on 18th September, their American counterparts largely displayed positive returns. This divergence was attributed to a strong rotation into sectors poised to benefit from the Federal Reserve’s easing cycle, coupled with a preference for defensive sectors, both factors extending the rally in US equities. Despite September's historical tendency for negative seasonality, equities received a boost from economic data that reinforced the soft landing narrative. Additionally, the Fed's outsized 50 bps rate cut further bolstered market sentiment.
- According to the CME FedWatch tool, interest rate swaps have priced in a 61% probability that the Fed rate will be set lower, in the target range of 4.25 - 4.50%% at its 7th November meeting and a 39% probability of a 25 bps rate cut on that date. Yields have decreased across regions in September, following a volatile month in August. The US 10-year yield was -9.7 basis points (bps) to 3.784% as of 25th September, while the 10-year German Bund was -4.2 bps to 2.158%. The spread between the two widened by 3.3 bps from 157.8 bps at the end of August to 161.1 bps.
- The US dollar weakened throughout September. The US Dollar Index, at 100.92, was -0.76%, while the YTD performance by 25th September continued its decline to -0.41%. The euro was +0.79% against the dollar, while Sterling was +0.89% in September.
Regional breakdown
US
S&P 500 +1.31% MTD +19.97% YTD
Nasdaq 100 +1.89% MTD +18.54% YTD
Dow Jones +1.55% MTD+11.99% YTD
Russell 2000 -0.91% MTD +8.41% YTD
Note: As of 5:00pm EDT 25 September 2024.
Source: Factset
With the exception of the Energy, Financials and Health Care sectors, all other S&P 500 sectors experienced positive performance in September. Consumer Discretionary has led the index's performance this month at +7.25%, followed by Utilities at +5.68% and Communication Services +2.88%.
In September, as it did in August, the equal-weighted version of the S&P 500 has underperformed the benchmark by 0.53 percentage points MTD, yielding a +0.78% return compared to the S&P 500's +1.31%. The equal-weighted version has achieved a +12.01% YTD return, compared to the S&P 500's +19.97%.
Source: Factset
An analysis of the past five years (60 months) reveals that August performance for major US stock indices has been subdued, all falling below their median monthly returns. The S&P 500 and Russell 2000 both rank at the 40.6th percentile for September performance, suggesting that 36 of the past 60 months have seen stronger returns. The Nasdaq 100’s September performance of +1.89% ranks at the 49.1th percentile, implying that 31 of the past 60 months revealed a superior performance. It is the highest among the US indices analysed. The Dow Jones Industrial Average's September ranks at its 47.4th percentile, this indicates that 28 months out of the past 60 have experienced a more negative return than its current +1.55%.
Europe
Stoxx Europe 600 -1.13% MTD +8.38% YTD
Germany DAX +0.06% MTD +12.94% YTD
FTSE 100 -1.29% MTD +6.92% YTD
France CAC 40 -0.86% MTD +0.30% YTD
Spain IBEX 35 +3.43% MTD +16.73% YTD
MSCI Europe -1.24% MTD +6.92% YTD
Source: Factset
In September, the Stoxx Europe 600 displayed a nuanced performance across its sectors, with ten of its seventeen sectors in positive territory. Travel & Leisure emerged as the frontrunner, +5.77%, followed by Retail +5.03% and Basic Resources at +3.64%.
Conversely, Autos & Parts was -6.75%, while Health Care declined -5.60%.
A comparative analysis of the Stoxx Europe 600 Equal Weight (EW) index reveals a contrasting picture. The EW index, which assigns equal weight to each constituent company, posted a +0.08% return in September, outperforming the Stoxx Europe 600's -1.13%. Moreover, its YTD performance stands at +6.80%, 1.58 percentage points lower than the European benchmark. This suggests a more evenly distributed increase across companies within the main index during this month, potentially influenced by sector rotation coupled with the expectations of lower borrowing costs benefiting small- and mid-caps.
Source: Factset
An analysis of European equity indices over the past five years (60 months) indicates that their September performance has been generally lacklustre in comparison to their American counterparts, with the notable exception of Spain’s IBEX 35.
The Stoxx Europe 600's September performance ranks at the 35.5th percentile, while MSCI Europe's performance falls even lower, at the 32.2nd percentile. However, it is worth noting that the Stoxx Europe 600 marginally outperformed the MSCI Europe during this period by 0.11 percentage points.
Spain's IBEX 35 stands out as the top performer among European indices in September, with a gain of +3.43%, placing it at the 77.9th percentile. This suggests that the index has only experienced stronger performance in 13 of the past 60 months.
Both Germany's DAX and France’s CAC 40 exhibited September performances at the 38.9th percentile, indicating that their performance in 37 of the past 60 months has been superior to that of September 2024. The DAX, however, managed a positive performance of +0.06%, while the CAC 40 recorded a negative performance of -0.86%.
The UK’s FTSE 100, with a decline of -1.29%, registered the weakest September performance among the analysed European indices, positioning it at the 30.5th percentile. This implies that the FTSE 100 has demonstrated better performance in 42 of the past 60 months.
As of 24th September, according to LSEG I/B/E/S data for the STOXX 600, Q2 2024 earnings are expected to increase 3.0% from Q2 2023. Excluding the Energy sector, earnings are expected to increase 2.1%. Q2 2024 revenue is expected to decrease 0.8% from Q2 2023. Excluding the Energy sector, revenues are expected to decrease 1.3%. Of the 295 companies in the STOXX 600 that have reported earnings by 24th September for Q2 2024, 52.9% reported results exceeding analyst estimates. In a typical quarter 54% beat analyst EPS estimates. Of the 354 companies in the STOXX 600 that have reported revenue by 24th September for Q2 2024, 58.5% reported revenue exceeding analyst estimates. In a typical quarter 58% beat analyst revenue estimates.
Financials, at 74%, is the sector with most companies reporting above estimates. At 9%, Financials is also the sector that beat earnings expectations by the highest surprise factor. In the Real Estate sector only 20% of companies reported above estimates. Basic Materials’ earnings surprise factor was the lowest at -9>%. The STOXX 600 surprise factor is 4.3%. The forward four-quarter price-to-earnings ratio (P/E) for the STOXX 600 sits at 13.3x, below the 10-year average of 14.4x.
During the week of 30th September, there are no companies scheduled to report.
Analysts expect positive Q2 earnings growth from nine of the sixteen countries represented in the STOXX 600 index. Portugal (38.6%) and Spain (29.1%) have the highest estimated earnings growth rates, while Ireland (-45.7%) and Poland (-12.8%) have the lowest estimated growth.
Preview of Q3 Earnings
As another corporate earnings reporting season is about to commence, expectations for S&P 500 companies' performance have moderated compared to the beginning of the quarter, a trend consistent with historical Q3 earnings revisions.
As we approach the end of Q3 2024, both analysts and companies have revised their earnings projections downward, in line with typical seasonal adjustments. Despite this decline, the index is still expected to post its fifth consecutive quarter of y/o/y earnings growth.
Current projections indicate a +4.6% y/o/y earnings growth for the S&P 500, a decrease from the +7.8% growth rate estimated on 30th June. Should this +4.6% figure materialise, it will mark the fifth straight quarter of positive y/o/y earnings growth for the index.
Earnings revisions: decrease in earnings growth rate since 30th June
The current estimated earnings growth rate for the S&P 500 for Q3 2024 reflects a -3.0% decrease from the initial estimate of $548.7 billion at the beginning of the quarter, with the current projection at $532.5 billion. On a per-share basis, estimated earnings for Q3 2024 have also seen a -3.2% reduction since 30th June. This decrease aligns closely with both the 5-year and 10-year averages, which both stand at -3.3%.
Eight sectors have experienced a decline in dollar-level earnings due to downward revisions in their earnings estimates including the Energy, Industrials, Materials, and Health sectors. Conversely, three sectors—Communication Services, Information Technology, and Financials—have seen a minor increase in expected dollar-level earnings, less than +1%, due to upward revisions in their estimates.
S&P 500 Earnings Growth in Q3: +4.6%
Eight out of the eleven sectors are projected to demonstrate y/o/y earnings growth for Q3 2024, with Information Technology, Health Care, and Communication Services leading this positive trend. In contrast, the Energy sector is anticipated to experience the most significant y/o/y decline in earnings.
The Information Technology sector is projected to lead with the highest y/o/y earnings growth rate among all sectors, estimated at +15.3%. Within this sector, five out of six industries are anticipated to report y/o/y earnings growth, with Semiconductors & Semiconductor Equipment (+37%) and Technology Hardware, Storage, & Peripherals (+13%) exhibiting particularly robust increases. The Communications Equipment industry (-16%) is the sole exception. Notably, Nvidia ($0.74 vs. $0.40 in Q3 2023) is expected to be the primary driver of earnings growth for the sector. Excluding this company would significantly reduce the blended y/o/y earnings growth rate for the Information Technology sector from 15.3% to 7.9%.
Health Care boasts the second-highest growth rate at +11.2%. At the industry level, three out of five industries within the sector are expected to report y/o/y earnings growth, with Pharmaceuticals (+32%) and Biotechnology (+20%) demonstrating substantial double-digit increases. Conversely, Life Sciences, Tools & Services (-11%) and Health Care Provider Services (-11%) are projected to experience a y/o/y decline in earnings. Pfizer ($0.59 vs. -$0.17), Eli Lilly and Company ($4.49 vs $0.10), and Moderna ($1.85 vs. $9.53) are anticipated to be the largest contributors to earnings growth for the sector. If these three companies were excluded, the Health Care sector's performance would shift from a y/o/y earnings growth of +11.2% to a decline of -6.7%.
The Communication Services sector is projected to achieve an earnings growth rate of +10.5%. Within this sector, three out of five industries are expected to report double-digit year-over-year earnings growth: Entertainment (+33%), Wireless Telecommunication Services (+33%), and Interactive Media & Services (+15%). Conversely, Diversified Telecommunication Services (-7%) and Media (-3%) are anticipated to experience a year-over-year decline in earnings. Alphabet ($1.83 vs. $1.55) and Meta Platforms ($5.19 vs. $4.39) are projected to be the primary contributors to the sector's earnings growth. Excluding these two companies would dramatically reduce the estimated y/o/y earnings growth rate for the Communication Services sector from +10.5% to 4.4%.
In contrast, the Energy sector is projected to face the most substantial y/o/y earnings decline among all sectors, at -17.6%. This decline is largely attributed to the average price of oil in Q3 2024 of $75.97, which is 8% lower than the average price seen in Q3 2023 ($82.22). In terms of sub-industry performance, three out of five sub-industries in the sector—Oil & Gas Refining & Marketing (-69%), Oil & Gas Exploration & Production (-6%), and Integrated Oil & Gas (-6%)—are expected to report lower earnings compared to a year ago. On a positive note, Oil & Gas Storage & Transportation (+14%) and Oil & Gas Equipment & Services (+14%) are predicted to demonstrate y/o/y growth in earnings. The Oil & Gas Refining & Marketing industry is identified as the primary contributor to the sector's earnings decline. If this industry were excluded, the estimated y/o/y earnings decline for the Energy sector would significantly improve from -17.6% to -3.3%.
S&P 500 Net Profit margin: +12.2%
According to FactSet, the net profit margin for the S&P 500 in Q3 2024 is projected to be 12.2%. This figure aligns with both the previous quarter's net profit margin and the year-ago net profit margin, which was also at 12.2%. Notably, the projected net profit margin surpasses the 5-year average of 11.5%.
Sector-specific analysis reveals that four sectors are expected to experience a y/o/y increase in their net profit margins in Q3 2024 compared to Q2 2023. Leading this growth would be Information Technology with a 0.9 percentage point increase (25.9% vs. 25.0%). Conversely, seven sectors are expected to report y/o/y declines in their net profit margins led by Energy with a 1.3 percentage point decrease (9.3% vs. 10.6%).
Furthermore, six sectors are anticipated to report Q3 2024 net profit margins exceeding their 5-year averages, with Consumer Discretionary (9.2% vs. 6.7%) demonstrating the most significant increase. In contrast, five sectors are expected to report Q3 2024 net profit margins below their 5-year averages, most notably the Health Care with a 1.4 percentage decrease (8.3% vs. 9.7%).
Looking forward to Q4 2024 and 2025
Looking ahead, analysts anticipate robust y/o/y earnings growth rates of +15.0%, +14.6%, and +13.7% for Q4 2024, Q1 2025, and Q2 2025, respectively. For the entirety of calendar year 2024, analysts are projecting a y/o/y earnings growth of +10.0%. Furthermore, for calendar year 2025, analysts predict a y/o/y earnings growth of +15.2%.
The bottom-up target price over the next 12 months for the S&P 500 is currently set at 6,280.17, representing a +9.8% increase over the closing price of 5,719.13.
At the sector level, the Energy (+16.9%), Information Technology (+15.4%), and Communication Services (+14.1%) are poised to experience the most significant price increases, as these sectors exhibit the largest upside differences between the bottom-up target price and the closing price. Real Estate (+3.2%) and Consumer Staples (+3.6%) are anticipated to see the smallest price increases, given their minimal upside differences between the bottom-up target price and the closing price.
Which sectors and companies are sell-side analysts most bullish and bearish about now?
There are currently 11,882 ratings on stocks within the S&P 500. Of these, 54.5% are Buy ratings, 40.2% are Hold ratings, and 5.2% are Sell ratings. It's worth noting that the percentage of Buy ratings is slightly below its 5-year average of 54.6%, while the percentage of Hold ratings is above its 5-year average of 39.4%. Conversely, the percentage of Sell ratings is below its 5-year average of 6.0%.
At the sector level, analysts express the most optimism towards the Communication Services, Energy, and Information Technology sectors, as these three sectors have the highest percentages of Buy ratings at 64%, 62%, and 61%, respectively. In contrast, analysts are most pessimistic about the Consumer Staples, Utilities, and Materials sectors, which have the lowest percentages of Buy ratings at 43%, 48%, and 49%, respectively. The Consumer Staples sector also holds the highest percentage of Hold ratings at 50%, while the Utilities sector has the highest percentage of Sell ratings at 9%.
After rising to 55.2% at the end of June, the overall percentage of Buy ratings for the S&P 500 has experienced a three-month consecutive decline, reaching 54.6% today. Among the eleven sectors, Consumer Staples (decreasing to 42.8% from 45.9%) and Utilities (decreasing to 48.0% from 50.5%) have witnessed the most significant reductions in their percentages of Buy ratings since 30th June.
In contrast, Communication Services (increasing to 63.7% from 62.4%) and Materials (increasing to 49.3% from 48.1%) have seen the largest increases in their percentages of Buy ratings during the same period.
Interestingly, three of the top four S&P 500 companies with the highest percentage of Buy ratings also belong to the Magnificent 7: Amazon, Microsoft, and Nvidia. The remaining top ten companies with the highest percentage of Buy ratings in the S&P 500 are GE Aerospace, Schlumberger, Axon Enterprise, UnitedHealth Group, Vistra, United Airlines, Delta, all with Buy Ratings percentages exceeding 90%.
Conversely, Franklin Resources, Paramount Global, T. Rowe Price Group, Consolidated Edison, Garmin, Illinois Tool Works, Expeditors International of Washington, Factset, Southwest Airlines, and Mettler-Toledo International are the 10 companies with the highest percentage of Sell Ratings, ranging from 44% to 29%. Furthermore, the percentage of Neutral Ratings in these companies varies from 46% to 67%.
Points for investor consideration: positioning and market sentiment
Hedge funds increase short positions amidst market optimism
Despite the substantial rally in equities over recent weeks, culminating in the S&P 500 reaching its 41st all-time high on Tuesday, market positioning is not perceived as an impediment to further gains.
JPMorgan observed that hedge funds have been adding significantly more short positions than long ones over the past four weeks, with particular scrutiny on the tech sector. Goldman Sachs echoed this sentiment, noting a substantial reduction in length in US tech over the last four months. They highlighted that the ratio of longs to shorts even dipped to the 1st percentile on a 5-year lookback early last week.
BofA indicated that CTA positioning in US equities remains unstretched, evidenced by the modest move up on Thursday despite the sharp rally in equities to new all-time highs. Deutsche Bank also reported a slight increase in systematic strategies positioning last week but emphasised that it remains only marginally above neutral.
While acknowledging the substantial inflow of over $300 billion into equities since late April, Deutsche Bank asserted that this level is typical of upward cycles and believes there is potential for continued inflows.
Sentiment and flows point to continued risk-on momentum
Sentiment and flow data align with the significant increase in risk appetite observed over the past two weeks. This surge was primarily fueled by the Fed's policy pivot, growing confidence in a soft landing scenario, and renewed enthusiasm for the long-term growth prospects of AI.
The AAII bull-bear spread experienced a substantial 15.6 percentage point jump to 24.4% in the week ending 19th September, marking the most significant weekly increase since early November of the previous year. The report highlighted that the bull-bear spread has now exceeded its historical average of +6.5% for the 19th time in 20 weeks.
Furthermore, BofA’s Flow Show report indicated that US equities attracted nearly $34 billion in inflows in the week ending 18th September. This represents the largest inflow in nine weeks and the third largest this year, following two consecutive weeks of outflows. Consumer funds were a standout, recording their most substantial inflow in eight months. Conversely, the defensive-leaning Utilities sector, which has been a strong performer this year, experienced its largest outflow since May. This coincides with Wells Fargo's recent downgrade of Utilities from overweight to neutral.
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