As we approach the second quarter earnings season, BofA analysts are predicting a slowdown in growth for the top-performing “Magnificent 7” stocks for the second consecutive quarter. This trend is expected to continue into the third quarter as well.
According to the brokerage, macroeconomic indicators are pointing towards a weaker earnings season in the second quarter. However, there is some optimism as Q2 is anticipated to be the first quarter of earnings per share (EPS) growth since the fourth quarter of 2022 for the remaining 493 stocks in the S&P500 index.
BofA analyst Ohsung Kwon stated that the consensus is expecting a 9% year-over-year increase in EPS for the second quarter, compared to a decline of 6% in the same period last year. The brokerage forecasts a 2% beat (11% year-over-year growth), which is in line with historical averages but the smallest since the fourth quarter of 2022.
In a recent Earnings Tracker note, Kwon highlighted the correlation between the outperformance of the technology sector in stock prices versus earnings. The brokerage believes that as this growth differential narrows, it will serve as a catalyst for the market to diversify. Additionally, BofA expects cost-cutting measures to result in improved margins for the other 493 stocks in 2024-25.
For the upcoming earnings season, BofA’s team identified industrials as the sector most likely to surprise on the upside, while communication services and materials are expected to underperform.
Despite challenges faced by companies globally over the past two years, including a weak macro environment, rising raw material costs, and sluggish consumer spending, BofA remains optimistic. The brokerage believes that unless demand deteriorates further, companies have already adjusted to the current demand environment by cutting costs and enhancing efficiency.
The adoption of artificial intelligence (AI) by companies has been a major trend over the past year, and BofA’s analysts see no signs of this slowing down. While the monetization of AI may take longer than initially expected, hyperscalers are making significant investments in this technology. Consensus estimates project a 34% increase in hyperscalers’ capital expenditure in 2024, amounting to around $200 billion.
Looking at small-cap companies, BofA expects a 15% year-over-year decline in earnings for the second quarter, an improvement from the 20% decrease in the previous quarter. The median small-cap company is expected to see an 8% year-over-year decline in earnings, compared to a 5% drop in the first quarter.
In conclusion, BofA’s analysis provides insights into the upcoming earnings season and market trends. The brokerage remains cautiously optimistic about the performance of companies and sectors, emphasizing the importance of cost-cutting measures and investments in AI for future growth.