Corporate America is signaling good things ahead, defying the challenges:

• What recession? Big “worries” have faded
• Show me the money: Shareholders are reaping more rewards
• Capex comeback: Companies have big spending plans
• Watch your step: Not all are created equal
• Why it all matters: Earnings power long-term returns

What recession? Big “worries” have faded

Companies are having a much better earnings season than expected. Despite Street estimates for paltry profit growth just a few weeks ago, analysts now see S&P 500 companies growing earnings by more than 5% year-over-year. That marks a third consecutive quarter of growth, putting the angst of prior years in the rear-view. When 2024 is all said and done, the year is expected to boost profits by 10%.

That acceleration comes as C-suites seem less and less worried about the macro headwinds. Back in 2022, roughly 90% of S&P 500 companies cited “inflation” in their earnings conference calls. This season, just over half have made mention. With those frustrations fading, firms are also now refocusing on growth and innovation: Call-outs of “AI & machine learning” have risen from about 15% of companies to 40%. That’s symbolic of both a better macro backdrop and a broadening belief in the power of transformative technologies.

Here’s the other thing: All S&P 500 sectors are beating Street estimates set for their profits this quarter. Tech is still the big driver of the momentum – and for good reason – but the Q1 2024 season is sharing the wealth. Looking into 2025, that “catch-up” from other companies should continue. Both the so-called Magnificent 7 and the “remaining 493” other companies in the S&P 500 are expected to grow earnings by double-digits next year.

Show me the money: Shareholders are reaping more rewards

With companies feeling good, they’re indulging in a shopping spree. Firms can do a lot of stuff with their extra cash – they can pay down debt, seek out strategic investments (both inside and outside of their businesses), and return it back into the pockets of shareholders.

That last point has been one of the hidden gems of the Q1 2024 season. More companies are buying back their stock this quarter and at a quicker pace. That, in turn, redivides the “profit pie” into fewer slices, offering more value to existing investors. Again, big tech companies are leading the charge: Apple’s $110 billion buyback announcement last week was the largest for any U.S. company ever and for context, if that buyback were its own company, it would be larger than the market caps of roughly 420 S&P 500 stocks.

But it’s not only tech. According to our Investment Bank, S&P 500 companies have broadly announced over $350 billion in buybacks so far this year. A number of key Street players think that figure could rise above $900 billion for all of 2024, up more than 10% over 2023.

Firms are returning value in more obvious ways, too. Meta and Alphabet announced their first-ever dividends this year, with five of the Magnificent 7 now paying one.

CapEx comeback: More companies have big spending plans

Speaking of spending, more firms are also ramping up capital expenditures (CapEx). By reinvesting back into their own businesses, that’s a bid for boosting future profit potential.

So far, S&P 500 CapEx is tracking at an above 7% pace in Q1 2024 versus the prior year, up from just over 4% in Q4. Big AI investments from big tech have been one of the biggest drivers. Amazon, Microsoft, Alphabet and Meta are expected to spend roughly $200 billion on CapEx in the next 12 months.

But again, it’s a broader story. Looking at Business Roundtable’s CEO survey, almost 40% of CEOs expect higher CapEx over the next six months – that’s the highest since Q4 2022 and notably up from 32% last quarter. The even better news: Optimistic expectations have a good track record of translating to real spending.

Watch your step: Not all are created equal

While Q1 earnings growth is strong and casting a wider net of companies, the dispersion in results is still wide.

Eight of 11 S&P 500 sectors are posting profit gains, but that growth ranges from over 35% in utilities to just 3.5% in consumer staples. Health care, energy, and materials are meanwhile seeing earnings declines.

Going a level deeper shows that dispersion is likewise evident within sectors, not just between them. For instance, in health care, a profit loss from Bristol Myers has overshadowed strength elsewhere: Glucagon-like-peptide-1 (GLP-1) giants like Eli Lilly and insurance providers like UnitedHealth had robust showings. Similarly, while energy has been full of weaker links, equipment and services companies like Schlumberger and Baker Hughes have posted double digit profit gains.

That’s an opportunity for alpha.

Why it all matters: Earnings power long-term returns

The S&P 500 is up close to 10% this year and earnings have been the secret sauce. That’s markedly different from the valuation-driven climb of last year. In other words, it’s no longer hope for a better future that’s driving stocks higher, but genuine, fundamental strength.

In the long run, it’s earnings that have proven to be the predominant driver of returns. Since 2020, earnings have contributed almost 70% of the S&P 500’s 73% total return (versus less than 15% from the climb in valuations).

The takeaway: Earnings season has offered a litmus test of where we stand. Judging so far, the vote is one of confidence. Headlines can feel hard to navigate, with a daily push-pull debate between growth and inflation – and not to mention a Federal Reserve that’s in data-dependent mode. But the resiliency in the face of those challenges is notable. That brings with it opportunity.

Your J.P. Morgan advisor is here to discuss what this means for you.

All market and economic data as of 05/10/2024 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

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The information presented is not intended to be making value judgments on the preferred outcome of any government decision or political election.

Index definitions:

The S&P 500 index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

The Magnificent 7 Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies (Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta, Tesla) classified in the United States and representing the Communications, Consumer Discretionary and Technology sectors as defined by Bloomberg Industry Classification System (BICS).

The S&P Midcap 400 Index is a capitalization-weighted index which measures the performance of the mid-range sector of the U.S. stock market.

Bonds are subject to interest rate risk, credit, call, liquidity and default risk of the issuer. Bond prices generally fall when interest rates rise.

The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to "stock market risk" meaning that stock prices in general may decline over short or extended periods of time.

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period.

The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases.

The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.

The NASDAQ 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the NASDAQ stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

The Russell 2000 Index measures small company stock market performance. The index does not include fees or expenses.

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