Quiet Strength: How an Under-the-Radar Earnings Season Defied the Soft-Landing Skeptics
A Macro Backdrop of Disinflation and Soft-Landing Hopes
By the time corporate America began reporting Q3 2024 results, the U.S. economy had already posted three straight quarters of above-trend GDP growth. Inflation was easing, with headline CPI approaching 3%, and the Fed had held rates steady since July. The environment offered a Goldilocks setup: demand remained strong while input costs softened—creating a margin-friendly backdrop. Despite fears around tariffs and geopolitical tension, the S&P 500 entered earnings season up 8% YTD, though volatility was high.
The Headline Scorecard
Blended EPS for the S&P 500 rose 4.2% YoY, marking a fifth straight quarter of positive earnings growth. Revenue expanded 5.2%, extending a 16-quarter streak. Analyst expectations had been slashed into the quarter, but 80% of companies beat consensus—driven largely by operating leverage and disciplined cost control.
Why the Bar Was Low—And the Beats So Big
Between June and September 2024, Q3 EPS estimates were cut by nearly 7%—the sharpest three-month downgrade in three years. Cautious corporate guidance, dollar strength, and goods demand normalization fueled this. But margin resilience, aided by automation and freight cost relief, led to the biggest upside surprise since Q4 2023.
Sector Winners and Laggards
- Technology: Cloud and AI investment boosted double-digit EPS gains.
- Healthcare: Led by Amgen’s 62% EPS surge on 23% revenue growth.
- Financials: Benefited from rising net interest income, despite credit normalization.
- Energy: EPS fell on Brent price declines, but free cash flow guidance stayed upbeat.
Big Tech: Still the Growth Anchor
Apple delivered $85.7B in revenue, with strength in services offsetting weaker iPhone sales. Microsoft, Meta, Alphabet, and Amazon all saw double-digit income growth, as enterprise AI and cloud spending fueled margins. Apple’s record $110B buyback underscored sector confidence.
Industrials and Materials: Diverging Paths
Industrial capex demand remained strong, buoyed by reshoring and infrastructure incentives. Materials firms, by contrast, struggled with weak Chinese construction demand and saw mid-single-digit EPS declines. Yet most signaled a 2025 volume rebound as inventory destocking winds down.
Financials: Margins Beat Credit Fears
Top banks posted 10–15% NII growth. Loan loss provisions rose modestly, but charge-offs stayed well below pre-COVID averages. Debt issuance and M&A activity lifted capital markets revenue.
Margins and the AI Productivity Dividend
Operating margins widened 60 bps sequentially, aided by automation and AI copilots. SG&A as a share of revenue fell to a post-pandemic low, even as nominal wages held firm—highlighting tech-driven productivity gains.
Market Reaction and Valuation Reset
The S&P 500 rallied 5% over the three-week reporting window, led by semis and healthcare. Forward P/E multiples rose from 19.2× to 20.7×—high but still below 2021 peaks. From here, earnings breadth and durability will matter more than multiple expansion alone.
Looking Ahead
Management guides to mid-single-digit EPS growth in Q4 2024, with acceleration seen in 2025 as AI adoption widens and destocking fades. But risks remain: tariff escalation and geopolitical shocks could disrupt the narrative. For now, the Q3 season reminds investors that disinflation doesn’t have to kill profit growth—and that corporate resilience may be stronger than assumed.
