10 of 11 Large Cap sectors see positive earnings growth – most in 3 years
It’s the (unofficial) end of earnings season, with NVDA reporting earnings yesterday afternoon (they beat, with +71% YoY earnings growth).
And it turned out to be a really strong quarter (for large caps).
When we did our Q4 earnings preview a month ago, analysts projected that 4 sectors (Staples, Industrials, Materials, and Energy) would see negative earnings growth (partly due to headwinds from rates and a -10% YoY drop in Energy prices).
Fast forward a month, and only Energy is on track for negative earnings growth. 10 sectors in positive territory is the most in three years.
And, as we highlighted last summer, it’s a sign that earnings are really broadening out beyond the Mag 7.
Broad-based earnings growth for Large Caps, Financials strength ends Small Cap earnings recession
This broad-based strength helped drive the highest earnings growth for the S&P 500 (chart below, orange bar) in three years, and the highest for the Nasdaq-100 (lighter blue bar) in one year.
For small caps, earnings were not broad-based, with four sectors in negative territory. Yet, for the first time in 2½ years, small caps saw positive earnings growth (green bar). Earnings recession over.
Much of the rebound for small caps came from Financials, which saw +31% YoY earnings growth. As we discussed in our earnings preview, Financials benefitted from the election boosting trading revenues, and post-election optimism increasing lending and dealmaking. (Mid cap Financials also saw +25% YoY earnings growth, but that wasn’t enough to offset negative earnings growth in four sectors).
2025 earnings growth expected to hold up (Large Caps) or turn solidly positive (Small & Mid Caps)
So, after a mostly strong end to 2024, the question is whether earnings can stay strong… or improve in 2025.
And right now, analysts are optimistic (chart below). Earnings growth is either expected to stay strong in 2025 (Nasdaq-100® and S&P 500) or turn solidly positive (S&P 400 and 600).
For mid caps and small caps, it’s easy to see why this is:
- They get a favorable comparison against negative earnings growth last year
- They benefit from lower rates since they have more floating rate debt
- And a still solid economy
- And any new tax cuts we might see (extending 2017 tax cuts offers no new boost)
For the large cap Nasdaq-100® and S&P 500, it’s tougher:
- They have to manage 10+% earnings a 2nd straight year (which they both did in 2017-18)
- When margins are already around record highs
- In an economy that, while still solid, will likely see slower growth than 2024
- And they’re less exposed to floating rates, so lower rates won’t help as much
One thing that could help large caps is that analysts project the recent broadening of to continue. After a couple sectors saw negative earnings growth last year, all sectors are projected to see positive growth in 2025. We’ll get our first look at whether large caps can meet these lofty expectations in a couple months when Q1 earnings season starts.
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