US 3Q earnings wrap: Up and up, but expenses a concern

Published on January 7, 2025 by Susan Mathew and Rakesh Kumar

The S&P 500 gained 25% in 2024, edging up over gains of around 24% in 2023. The 3Q earnings season gave it a fillip, with a strong showing from the communication and technology sectors. However, concerns about tech companies’ rising expenditure dulled the sheen, and the rally powered by artificial intelligence (AI) chip designer Nvidia slackened as it forecast its slowest revenue growth in seven quarters.

Almost all S&P 500 companies reported results for 3Q, with about 78% of them reporting a positive profit surprise to Bloomberg estimates, while about 21% missed. Eight of the 11 S&P 500 sectors marked earnings growth.

Topping the leaderboard for earnings growth for the quarter was the communication sector’s 22%, driven by profit beats of about 15% each by Facebook-owner Meta Platforms and Google’s parent Alphabet Inc. The technology sector followed with almost 18%, led by Nvidia’s near-9% profit beat. Apple Inc. and Microsoft Corporation also topped earnings estimates. However, Nvidia’s forecast, which was largely in line with expectations, left markets wanting more, with investors used to the company’s forecasts blowing out past estimates in some of the previous quarters.

The laggards were old-economy sectors such as energy, industrials and materials. The energy sector’s earnings contracted nearly 24% in the September quarter, with oil prices falling by 17% – the largest quarterly decline in a year – on concerns about the global oil demand outlook. Among companies, pipeline operator Kinder Morgan was one of the biggest weights in the sector.

While the US Federal Reserve’s (Fed’s) easing of the interest rate and Republican Donald Trump’s presidential election win saw the S&P 500 scaling new highs, policy uncertainty and possible economic disruption due to geopolitical tensions and wars in the Middle East have led to caution.

The Fed delivered another quarter-point cut in December – its third cut since it began its easing cycle in September 2024 – but Fed Chair Jerome Powell’s hawkish remarks saw markets hit the brakes on expecting more cuts this year. The S&P 500, which was up close to 30% for the year before the meeting, trimmed gains to end the year up about 25%.

For 4Q 2024, only 35 of the 107 companies that provided profit guidance issued forecasts above Street estimates, according to FactSet, while 72 issued forecasts below market expectations. FactSet expects 4Q earnings growth at 11.9% y/y, the most reported by the index since 4Q 2021.

Sector Performance

Communication services: Meta, Alphabet top estimates, but investors cautious about spending

The sector fared better than in 2Q, marking almost 22% earnings growth versus less than 10% in the prior quarter. In 3Q, the sector’s earnings surprise at 14% was the biggest among sectors’, while sales growth at 8.3% also saw it finish behind the technology and healthcare sectors. The S&P 500 communication services index was the best performing of the 11 sectors in 2024, up 40.2%. The outlook, however, is marred.

• Meta’s warning of a "significant acceleration" in AI-related infrastructure expenses in 2025 led to questions about its ability to cover AI costs even as it narrowed its total expenditure forecast for 2024.

• Alphabet, meanwhile, said its AI investments were "paying off", reporting a 35% surge in its cloud business. It added that US election-relatedspending lifted YouTube ad sales in the quarter. However, it said its capital expenditure in 2025 would be higher than in 2024.

What to watch:

• Will digital ad sales from Meta's core social media business continue to cover the cost of its AI buildout?

• Google’s hold on the digital ad market as it faces stiff competition from Amazon and TikTok. Its Search business also faces scrutinyfrom regulators seeking to break up the company.

Technology: Nvidia’s revenue forecast dulls sentiment; costs at Microsoft in focus

The S&P 500 technology index rose about 36.6% in 2024, thanks to Nvidia’s searing rally – which nearly tripled its share price over the course of the year – on its AI promise. The sector’s profits grew by about 18% and revenue by 11.4%.

• While Nvidia beat on sales and profit in 3Q, it forecast revenue growth at 69.5% for 4Q, a steep fall from 94% in the September quarter. It said supply-chain constraints impacted its chip production.

• Apple’s AI-enhanced iPhone sales pushed ahead of Wall Street expectations, but questions remain about the pace of sales, and the revenue forecast was perceived as being modest.

• Microsoft topped revenue and profit estimates, but it expects increased spending on AI in the December quarter and slower growth in its cloud business Azure.

What to watch:

• Nvidia’s CFO has claimed that it will exceed its initial projections of several billion dollars in sales of its Blackwell processors in the fourth quarter.

• Apple’s China sales, after they came in below expectations for the quarter.

• Will Microsoft’s AI investments be enough to keep pace with capacity constraints at its data centres?

Consumer: Optimism around holiday spending in an uncertain environment

For both consumer staples and consumer discretionary, nearly half of the companies fell short of revenue expectations. The consumer staples sector posted the least revenue growth, of 1.9% for the second consecutive quarter. The positive earnings surprise in consumer discretionary was driven by Nike, Deckers Outdoor, Amazon and Tesla, while Starbucks and Autozone were laggards. Despite the top-line challenges, earnings grew 16.5% in the consumer discretionary sector y/y, driven by a cost-conscious approach. The S&P 500 consumer discretionary sector gained about 30% in 2024, while the staples sector rose nearly 15%.

• Amazon reported better-than-expected earnings and revenue, driven by growth in the cloud computing and advertising businesses, while efficiency and continued cost-cutting boosted the bottom line. Amazon Web Services revenue grew 19%. Advertising was another bright spot; it grew 19%, outpacing growth in Amazon’s core retail business.

• Walmart delivered yet another beat-and-raise quarter, underpinned by strong e-commerce growth, continued grocery-share gain and improved performance in general merchandise that posted positive comps, breaking 11 straight quarters of decline. It raised full-year guidance based on strong YTD performance and on anticipation of a good holiday season. However, potential tariffs could force Walmart to raise prices.

• Tesla beat earnings estimates despite missing on revenue. Vehicle deliveries increased 6% y/y, following two straight quarters of decline, although they were below expectations. Chief Executive Elon Musk anticipates vehicle growth to reach 20-30% in 2025 (versus analyst expectations of c.15%), due to “lower-cost vehicles” and the “advent of autonomy”.

• Target posted underwhelming results, missing top-line and bottom-line expectations due to softness in discretionary categories and supply-chain cost pressures and cut full-year guidance back after raising it last quarter.

What to watch:

• Holiday-season spending – likely to remain volatile due to the caution generated by the election result, although the November retail sales report bodes well for spending.

• Impact of tariffs. Potential tariffs on imports from China, Mexico and Canada will have negative consequences on supply and prices, and thus consumer spending. In addition, a pull-forward in demand is expected early next year in the wake of tariffs.

• Further interest rate cuts by the Fed are likely to have a favourable impact on big-ticket discretionary spending.

Financial: Fed’s easing drives investment-banking gains, but repayment concerns persist

The financial sector posted earnings growth of more than 6%, with profits at big Wall Street lenders beating estimates by 6.5-18.4%. They benefited from the Fed’s monetary policy easing, as it prompted companies to issue debt and equity. Executives at top lenders also sounded optimistic as they noted that US consumer finances remain healthy, thanks to a solid job market, and that capital market activity is rebounding. The S&P 500 financials index rose about 30% in 2024.

• JPMorgan Chase, Morgan Stanley and Wells Fargo cited gains in investment banking and rising interest payments. However, Wells Fargo’s revenue missed estimates, and the bank expects a 9% drop in its net interest income in 2024.

• Among asset managers, the rally in the US stock market saw BlackRock’s assets under management hit a record high for the third straight quarter.

What to watch:

• Overall, banks’ provisions for loan non-repayments are rising on concerns that loans may not be repaid as consumers deplete savings built up during the pandemic. JPMorgan said it has set aside USD3.11bn in the quarter for likely credit losses, compared with USD1.38bn a year earlier.

• The impact of the pace and magnitude of Fed easing on lenders’ interest-earning capacity.

Energy: Falling crude prices, demand hit oil companies

The energy sector was the worst-performing sector in the September quarter, with its profits tumbling 23.7%. Earnings of the oil industry were hit in 2024 as crude prices and growth in fuel demand declined. The S&P 500 energy index gained 5.7% in the year.

• While profits at both Exxon and Chevron topped estimates, they fell from a year ago. Exxon’s production hit record highs as it saw its first quarter include output from Pioneer Natural Resources, which it acquired for USD60bn in May.

• Pipeline operator Kinder Morgan was hit by weaker commodity prices and lower crude volumes. Its earnings missed estimates, and it lowered its annual forecast. However, it forecasts higher earnings for 2025 on hopes of growth in its natural gas pipelines and energy transition ventures.

What to watch:

• Expense-curbing efforts at Chevron: The company plans up to USD3bn in cost savings through 2026.

• Oil supply outrunning demand next year, with exporter group OPEC planning additional supply from December 2024.

Healthcare: Pfizer shines; focus on pharmacy benefit managers due to policy concerns

The sector’s earnings grew more than 14% in the third quarter, and it posted the fourth-largest earnings surprise among sectors, at 9%. Pfizer’s 66% profit surprise was the key driver, while earnings at Johnson & Johnson and Bristol Myers Squibb surprised 10.7% and 21.2%, respectively. The S&P 500 healthcare index was up just about 2.6% in 2024.

• Pfizer’s revenue and earnings beat estimates, and it raised its full-year profit forecast as it benefited from strong sales of its COVID-19 treatment Paxlovid.

• A major miss was CVS Health, which lagged estimates by nearly 26% on rising medical costs at insurer Aetna. However, its shares rose after it appointed former UnitedHealth Insurance Head Steve Nelson to head the business.

What to watch:

• Pfizer faces pressure from hedge fund Starboard Value, which said the board should hold management accountablefor the company's underperformance.

• Pfizer’s cost-cutting programme: This is on track to deliver at least USD4bn in savings in 2024.

• Pharmacy benefit managers including CVS Health, after a bipartisan bill was introduced that would force health insurers or drug middlemen to divest their pharmacy businesses.

Sources:

• CME FedWatch – CME Group

• S&P 500 Daily Global index dashboard

• FactSet Earnings Insight

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