US 2Q 2024 earnings wrap: Nvidia tempers AI bull run

Published on September 16, 2024 by Susan Mathew and Rakesh Kumar

The S&P 500 (SPX) scaled new highs during the 2Q earnings season and is up about 17.6% year to date (YTD). However, chip designer Nvidia slowed the SPX’s rally as the margin of its earnings beat and largely in-line forecast underwhelmed investors expecting blowout figures they were used to. Nvidia has powered much of the broader rally on its promise in the artificial intelligence (AI) drive.

With almost all companies having reported results for the June quarter, the SPX is on track to report an earnings growth rate of over 11%, its highest since 4Q 2021, according to FactSet. This would also mark its fourth consecutive quarter of y/y earnings growth. FactSet notes that around 79% of 2Q profits have topped earnings estimates, above the 10-year average of 74%.

Sector-wise, 9 of the 11 S&P 500 sectors recorded earnings growth, 1 more than in the previous two quarters. Despite market disappointment over Nvidia’s figures, the technology sector led the board on sales and earnings growth. It reported 20.6% earnings growth in 2Q. This was followed by the financial sector’s 18.2% profit growth, with the sector also reporting the largest earnings beat of all 11 sectors.

The materials and industrial sectors reported sales and earnings declines. In the materials sector, a 92% profit miss from lithium producer Albermarle Corp. and disappointing figures from other chemical makers outweighed solid numbers from miners such as Freeport-McMoRan and Newmont Corp.

Energy was among the sectors that saw the smallest earnings growth, with Chevron’s near-13% earnings miss weighing on the sector. Chevron reported lower oil output and struggled with its USD53bn acquisition of Hess Corp. More broadly, oil refiners faced the challenge of softening demand after production soared earlier in the year. Falling oil prices have also impacted shares of energy companies — the S&P 500 energy index’s price growth is the lowest on the leaderboard, up a mere 2.9% YTD, largely due to a slide in the crude price, which fell 16% over last month and 6% YTD.

A wider-than-expected loss and an over-USD9bn write-down from Warner Bros Discovery weighed on the communications sector, the only sector to miss profit expectations. While all other sectors beat profit expectations on average, the communications sector missed expectations by almost 10%.

For the third quarter, only 50 of the 109 companies that provided profit guidance have issued forecasts above Street estimates, according to FactSet.

The results come against the macroeconomic background of an imminent interest rate cut by the US Federal Reserve (Fed). A less-than-expected rise in employment, according to the latest data, saw markets start to expect the possibility of a larger cut; subsequently, August consumer price data showed some stickiness in underlying inflation, tempering the dovishness. Markets are now pricing in a 55% chance of a 25 basis point (bps) interest rate cut on 18 September – the first since it raised rates by 525bps since March 2022. Traders expect the central bank to slash the rate at the subsequent two meetings for the year as well.

Markets are also keeping a close watch on the US presidential election in November to assess policy differences between the two leading candidates. Democratic Party candidate and current Vice President Kamala Harris has been widening her lead against her Republican rival and former President Donald Trump.

Sectoral highlights:

Technology and the Magnificent Seven: Nvidia fails to meet lofty expectations

The technology sector’s 10.4% sales growth was the highest among sectors’. However, despite the solid numbers, concerns persist. The S&P 500 tech sector is up over 25% YTD, but tech stocks were routed following Nvidia’s and Intel’s results, slowing the rally. Among the Magnificent Seven — Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla — besides disappointment over Nvidia’s forecast, Microsoft and Alphabet flagged rising expenses, while Tesla missed profit expectations and reported its lowest profit margin in more than five years as it slashed prices.

• Nvidia’s 2Q revenue grew more than 100% y/y to USD30.0bn, above estimates of USD28.8bn, according to Bloomberg, while profit of USD0.68 per share beat the USD0.64 expected by the Street. However, the magnitude of the beat was smaller than in previous quarters, prompting investors to wonder about the payoffs from expected advancements in AI that have lifted Nvidia more than 150% this year. This also overshadowed a USD50bn share buyback announced by the company. Nvidia also confirmed a further production delay in its Blackwell chips to 4Q.

• Facebook owner Meta Platforms shone as it beat 2Q revenue expectations and forecast current-quarter growth above Wall Street estimates. Apple shares also got a boost after it said its 3Q iPhone sales were better than expected and forecast more gains.

• Intel Corp.’s over-80% profit miss was another major upset and weighed the most on the tech sector. Intel said its foundry business, which makes chips on contract for outsiders, was "floundering", and that it plans to lay off more than 15% of its workforce and suspend dividends starting in 4Q. Shares sank around 26% following the results, and Intel’s shareholders sued the company, saying it concealed its problems.

What to watch:

• Any forecast revisions from Nvidia, as well as production updates on its Blackwell chips

• Lingering impact on other tech stocks after Nvidia’s results raised questions about AI investments and spending

• Intel’s restructuring plan and shareholder lawsuit

Financials: Looking to the Fed

While the sector fared the best, with investment banking a bright spot for some of the big banks, there is still caution among investors as banks face higher expenses to retain customers who seek greater yields. The sector index is up about 19% YTD.

• JP Morgan reported record results due to dealmaking, strong capital markets and stronger-than-expected investment banking revenue. However, Chief Executive Jamie Dimon flagged caution around the economic outlook.

• Wells Fargo’s profit declined, its net interest income (NII) missed estimates and it warned that NII could fall further and hit a trough by year-end.

What to watch:

• Rising expenses and declining NII

• Impact of the Fed’s expected interest rate cut

Consumer: A more cautious spending environment

Both consumer staples and consumer discretionary were at the bottom in terms of percentage of companies with a positive revenue surprise, as nearly half of the companies fell short of revenue expectations. Moreover, the consumer staples sector had the fewest companies (70%) beating earnings estimates, with minimal growth in revenue (+1.2%) and earnings (+1.5%). The positive earnings surprise in consumer discretionary was driven by Carnival Corporation, MGM Resorts, Deckers Outdoor, Amazon and Nike, while Ford and Tesla were laggards. Despite the top-line challenges, earnings grew 13.9% in the consumer discretionary sector y/y, likely due to companies continuing to take a cost-conscious approach.

• Amazon reported weaker-than-expected sales and issued softer sales guidance for the third quarter amid sluggish growth in its core retail business due to competitive pressure from Temu and Shein. Amazon Web Services was a bright spot, growing 19% and beating estimates.

• Walmart’s results beat expectations, driven by traffic growth, continued grocery share gains, improved performance in general merchandise, strong e-commerce growth and robust growth in advertising and third-party marketplace businesses. It raised full-year guidance based on a strong first-half performance and steady consumer health, although it noted a more cautious consumer in the second half.

• Dollar stores posted weak results and cut the full-year revenue and earnings outlook due to continued financial pressure on its core lower-income consumers, amid Walmar gaining share from value-conscious shoppers across income levels at the expense of these discounters.

• Target’s results were better than feared, beating expectations; it raised its full-year EPS outlook based on strong profitability in the first half, despite a cautious sales outlook.

What to watch:

• Consumer spending – likely to remain volatile due to the upcoming election

• Rate cut likely to impact big-ticket discretionary spending favourably as consumers remain in wait-and-see mode

Healthcare: Stages a comeback after a weak 1Q

The sector, the worst earnings performer in 1Q with an over-25% decline, swung to profits last quarter, with profit growth of nearly 17%. Eli Lilly and Pfizer beat earnings by 50% and 30%, respectively, lifting the sector almost 15% YTD.

• Eli Lilly’s results beat expectations, and it raised its annual profit forecast, powered by demand for its blockbuster weight-loss drug and diabetes drugs Zepbound and Mounjaro.

• Pfizer also raised its annual profit forecast on demand for cancer treatments offered by Seagen, which it acquired for USD43bn last year, and strong sales of its heart-disease drug.

What to watch:

• Pfizer’s drugs and product pipeline as it strives to make up for shrinking demand for COVID-19 treatments

• Lilly’s fight for market share with Europe’s Novo Nordisk, which also has competing weight-loss and diabetes drugs.

How Acuity Knowledge Partners can help

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Sources:

• EarningsInsight_090624A.pdf
• dashboard-daily-global-markets.pdf (spglobal.com)

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