The push and the pull of U.S. earnings


Q1 results have brought a mix of highlights and lowlights. We examine these opposing forces, how the Magnificent 7 narrative may change in coming quarters, and how to calibrate equity exposure in this unique period.


May 9, 2024

Kelly Bogdanova
Vice President, Portfolio Analyst
Portfolio Advisory Group – U.S.

The setup heading into Q1 earnings season was tough.

The S&P 500 had mounted one of the best two-quarter rallies in history. Optimism among industry analysts prevailed. The Q1 consensus forecast hadn’t drifted down as much as it normally does in the weeks preceding the reporting season.

This raised the bar for S&P 500 companies and left the index vulnerable to a pullback if high-profile firms stumbled.

Right out of the gate, that’s exactly what happened. The market sold off following JPMorgan Chase’s less-than-perfect earnings report.

This misstep, combined with messy inflation data, a jump in Treasury yields, and a shift in Fed rate cut expectations, pulled the S&P 500 down 5.5 percent from its all-time high.

But since the latter part of April, the U.S. equity market has bounced back as the earnings and revenue growth pictures brightened and Treasury yields settled down.

What’s working

With 91 percent of S&P 500 companies having reported Q1 results thus far, there have been some notable highlights:

  • S&P 500 earnings per share (EPS) growth of 7.1 percent well exceeds the 3.8 percent Bloomberg consensus forecast when the earnings season began.
  • Nine of the 11 sectors are beating the pre-earnings season consensus EPS forecast. Energy is roughly in line. Health Care is the only sector lagging, but it’s lagging badly.
  • The magnitude of earnings beats slightly exceeds the past four-quarter average and is well above the long-term average.
  • No surprise, technology-related stocks including the Magnificent 7 are leading with the strongest EPS beat rates. But other sectors, such as Financials, are also contributing, which we view as a positive sign.
  • Revenue growth, which got off to a slow start, has risen to 4.2 percent, in line with Q4 2023 growth. Also, a variety of sectors are exceeding the S&P 500 revenue growth rate.
  • The full-year 2024 EPS consensus estimate is holding up well at $245 per share, as measured by Bloomberg. This is roughly flat compared to the forecast last summer. Normally at this point in the calendar, the full-year estimate has retrenched by about five percent.
  • Profit margins remain high for the S&P 500, technology-related stocks, and cyclical (economically sensitive) stocks. But margins for non-cyclical stocks are very low.

After lagging for many quarters, EPS growth is outpacing revenue growth

S&P 500 year-over-year growth

S&P 500 earnings-per-share and revenue, year-over-year growth

The line chart shows S&P 500 quarterly year-over-year earnings per share (EPS) and revenue growth from Q1 2022 Q1 2024 (as of May 9, 2024). Revenue growth exceeded EPS growth from Q1 2022 through Q2 2023. In Q3 2023, EPS growth rose sharply and began to exceed revenue growth. The data are as follows: Q1 2022, EPS 9.0%, revenue 13.1%; Q2 2022, EPS 8.0%, revenue 13.7%; Q3 2022, EPS 4.6%, revenue 11.3%; Q4 2022, EPS -2.4%, revenue 5.6%; Q1 2023, EPS -3.1%, revenue 4.5%; Q2 2023, EPS -5.8%, revenue 1.1%; Q3 2023, EPS 4.5%, revenue 2.1%; Q4 2023, EPS 8.2%, revenue 4.1%; Q1 2024, EPS 7.1%, revenue 4.2%.

  • Earnings per share
  • Revenue

*Q1 2024 reported results as of 5/9/24, subject to change.

Source – RBC Wealth Management, Bloomberg Intelligence

What’s not

The Q1 earnings season has also included some lowlights:

  • In terms of stock price reactions to Q1 reports, earnings beats have been rewarded less and earnings misses have been punished more than usual.
  • Earnings and revenue growth are once again skewed toward the Magnificent 7 stocks, as are upward revision trends for future quarters.
  • As a group, Mag 7 stocks are growing Q1 EPS by 49.3 percent, whereas EPS growth for the rest of the market has declined by 1.3 percent, according to Bloomberg Intelligence data.
  • EPS growth for growth stocks is trouncing value stocks by 42.1 percent to -4.5 percent mainly because of the Mag 7 effect.
  • There are very wide differences in sector EPS growth, with Communication Services, Consumer Discretionary, and Information Technology all growing EPS by over 20 percent – again, thanks partly to Mag 7 stocks. But Utilities is also seeing EPS growth above 20 percent. In contrast, EPS growth has declined by more than 20 percent for Health Care, Energy, and Materials.

Can the Magnificent 7 stay “magnificent”?

Later this year and next, the Mag 7 narrative could shift.

Mag 7 earnings growth is forecast to decline meaningfully from 2023 to 2025. This is due to difficult year-over-year comparisons and the law of large numbers. The bigger and more mature a company gets, the harder it is to deliver dramatic earnings growth year after year.

Magnificent 7 EPS growth is expected to slow

Annual EPS growth, year over year

Annual EPS growth of the Magnificent 7, year over year

The bar chart shows annual earnings per share (EPS) growth for Magnificent 7 stocks in 2023 and consensus forecasts for 2024 and 2025. In 2023, growth was 34.6%. In 2024, the consensus forecast is 25.2% growth. In 2025, the consensus forecast is 16.5% growth.

Note: 2023 actual data, 2024 and 2025 consensus estimates. * Magnificent 7 stocks are Apple, Microsoft, Alphabet,, NVIDIA, Tesla, and Meta Platforms.

Source – RBC Wealth Management, Bloomberg Intelligence; data as of 5/3/24

At the same time, earnings growth for non-Mag 7 stocks is expected to rise. If this plays out, we believe the Mag 7’s advantage should fade.

The Magnificent 7’s EPS growth advantage over the rest of the S&P 500 is expected to fade

Annual EPS growth, year over year

Annual S&P 500 EPS growth, year over year, with and without Magnificent 7

The bar chart compares annual earnings per share (EPS) growth for the S&P 500 and the S&P 500 excluding the Magnificent 7 stocks in 2023 and consensus forecasts for 2024 and 2025. In 2023, S&P 500 EPS growth 1.0%, S&P 500 excluding the Magnificent 7 -4.4%. The 2024 consensus forecast is S&P 500 9.6% and S&P 500 excluding the Magnificent 7 6.0%. The 2025 consensus forecast is S&P 500 13.5% and S&P 500 excluding the Magnificent 7 12.7%.

  • S&P 500
  • S&P 500 excluding Magnificent 7

Note: 2023 actual data, 2024 and 2025 consensus estimates.

Source – RBC Wealth Management, Bloomberg Intelligence; data as of 5/3/24

We think forecasts for the non-Mag 7 stocks are highly dependent on economic trends.

If GDP growth decelerates meaningfully later this year, non-Mag 7 stocks and the U.S. equity market as a whole could run into some bumpy patches again.

The consensus forecast for U.S. GDP growth is 2.4 percent in 2024 and 1.7 percent in 2025. Historically, annual GDP growth above 2.0 percent tends to correspond to above-average S&P 500 gains, according to a study by RBC Capital Markets U.S. Equity Strategy. However, when GDP was within a more sluggish 0.1 percent to 2.0 percent zone, the equity market often declined.

Walk a fine line

On one hand, we see further upside potential for the S&P 500 due to favourable consensus earnings growth forecasts for the index and most sectors. Yet we think portfolio exposure should factor in economic risks that stem from today’s unique period. The U.S. economy is still adjusting to the Fed’s aggressive rate hike cycle that followed significant pandemic-related stimulus.

We recommend maintaining Market Weight exposure to U.S. equities in order to balance the risks against the potential that the economy and S&P 500 earnings could prove to be resilient.

This publication has been issued by Royal Bank of Canada on behalf of certain RBC ® companies that form part of the international network of RBC Wealth Management. You should carefully read any risk warnings or regulatory disclosures in this publication or in any other literature accompanying this publication or transmitted to you by Royal Bank of Canada, its affiliates or subsidiaries.

The information contained in this report has been compiled by Royal Bank of Canada and/or its affiliates from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgments as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Every province in Canada, state in the U.S. and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, any securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.

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Kelly Bogdanova

Vice President, Portfolio Analyst
Portfolio Advisory Group – U.S.

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