The second quarter results season in the US is coming to an end. So far, results have surprised on the upside, with earnings per share (EPS) growth of 8% year-over-year, beating market estimates by 4%. One thing to note this season is the broadening of participation in earnings growth, as S&P 500 EPS has shown an increase even when excluding big tech (Mag-7) for the first time in five quarters. In terms of sector performance, we continue to see the strongest earnings growth in technology-related sectors. Indeed, Mag-7 earnings growth was 26% year-on-year.

However, despite the strong growth shown by Mag-7 companies this quarter and beating market expectations by 6% (vs +11% on average in the last 4 quarters), this has not been rewarded by investors, as the prices of all stocks -except Meta- fell by 8% on average in the three days after reporting. In other words, when you have a sector with such high valuations in historical terms and with so much implied earnings growth, it is not enough to beat estimates for the current quarter, but it must be above what has been surprising in previous quarters and also offer good guidance forward guidance.

Another risk focus is that the proportion of companies that have beaten sales estimates has declined markedly in the S&P 500 as a whole. This factor could put pressure on margins in the second half of the year, as slower revenue growth combined with persistent costs could affect companies' future profitability.

Against this backdrop, and already thinking further ahead to 2025, it is worth asking whether the market's expected earnings growth expectations of +15% may be a bit optimistic, especially in the context of a slowing US economy and valuations that are at an all-time high (today, the market trades at 21.5 times forward P/U, which represents a premium of 23% over its historical average).

For the same reason, the yardstick by which to measure corporate results of companies in the U.S. is different from when the market was at lower valuations and prior to the artificial intelligence boom. 

Finally, we note a crucial differentiation within the equity market: the S&P 500 equal weight trades at a 20% discount to its market cap-weighted version. This differentiation may present a better way to be exposed to the U.S. market.

Felipe de Solminihac
Investment Analyst Fynsa