Q4 Earnings Preview | Nasdaq

Financials surpass Mag 7 to drive Q4 S&P 500 earnings growth

Q4 earnings season kicked off last week, with a number of big banks reporting. It was a strong start since large-cap Financials are on pace to see the strongest earnings growth of any sector, at +49% YoY in Q4 (chart below, left bar).

There are a few reasons Financials are doing so well:

1. Trading revenues boosted by election-related activity
2. Fees for helping companies go public roughly doubled at many banks as IPO activity recovered, as predicted by our Nasdaq IPO Pulse
3. Optimism about the economy and regulatory outlook drove lending and dealmaking
4. Favorable comparison to Q4 2023, which saw -14% YoY earnings growth in part because of a $16bn charge from the FDIC to replenish its insurance fund after the March 2023 banking crisis.

After Financials, earnings are dominated by the three sectors that are home to the Mag 7 – Communication Services (+21% YoY), Tech (+14%), and Consumer Discretionary (+13%) – continuing the trend we’ve seen for the last two years.

We’ve also seen a continuation of another recent trend – negative earnings growth in Industrial, Materials, and Energy.

• High rates remain a headwind to the capital-intensive Manufacturing sector, weighing on Industrials and Materials
• Energy profits hurt by -10% YoY drop in oil and natural gas prices

Earnings have broadened out beyond Mag 7 for Nasdaq-100 and S&P 500

Another trend we’re seeing is that, while the Mag 7 remain a key driver of earnings, the rest of the S&P 500 and Nasdaq-100 are playing bigger roles, helped by the economy’s surprising strength in 2024.

As a group, the Mag 7 are projected to see earnings increase +21% YoY (chart below, green bars), marking their seventh straight quarter of at least +20% earnings growth – still benefitting from continued AI demand. And with the U.S. government announcing a $100bn AI initiative yesterday (that could rise to $500bn), it looks like that demand will be there in the years to come.

Excluding the Mag 7, the rest of the S&P 500 has seen positive earnings growth for three straight quarters (orange bars), while earnings growth turned positive for the rest of the Nasdaq-100 a year-and-a-half ago (blue bars).

Going forward, analysts expect earnings growth for the rest of the S&P 500 to range from +10% to +15% YoY in the next year, and even stronger growth for the rest of the Nasdaq-100®, nearly converging with the Mag 7’s projected earnings growth.

Nasdaq-100’s outperformance of S&P 500 partly due to expanding already-higher margins

A big reason why the rest of the Nasdaq-100 has seen better earnings growth than the rest of the S&P 500 in the last couple years comes down to margins.

Despite headwinds from higher rates, the rest of the Nasdaq-100 increased their margins to 18% from 16% since early 2023 (chart below, blue line), while they’ve been flat around 12% for the rest of the S&P 500 (orange line).

With margins already around record highs for the Nasdaq-100 and S&P 500, can companies push them to new highs? Analysts think so, projecting record-high margins for the S&P 500 in 2025.

If margins increase less than expected, however, companies will need to increase sales that much more to achieve the strong earnings growth expected in 2025… +15% YoY for the S&P 500 and +21% for the Nasdaq-100. So, margins will be something to watch this earnings season.

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