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Positive by Year-End?

Though results were mixed in the first quarter of 2024, analysts expect profit growth to be positive in all regions by the end of 2024.

By Jonathan Bauman, CFA,Amanda Rehmann, CIMA

Key Takeaways

Earnings growth was positive in the U.S., Japan and emerging markets but remained negative in Europe.

The earnings growth trend is improving in Europe, but profits remain in negative territory amid soft economic conditions.

The AI build-out remains a significant earnings growth driver worldwide, with its impact extending well beyond the U.S. and the Magnificent Seven.

Positive earnings growth trends continued across most regions during the first quarter of 2024. In the U.S., 78% of companies beat analysts’ expectations, exceeding the 10-year average. In all, profits climbed 5.7% compared to the first quarter of 2023.1

Profit growth was positive in Japan and emerging markets (EM) as well, rising 9.5% and 5.8%, respectively. Meanwhile, sales contracted amid soft economic conditions for the fourth consecutive quarter in Europe, keeping profit growth on the continent in negative territory at -5.45%.2

U.S. Utilities Benefited From AI Growth

Earnings growth was particularly robust in the U.S. utilities sector. Renewable electricity producers and electric utilities have seen rising demand for power to run the data centers that fuel the adoption and build-out of artificial intelligence (AI).

Meanwhile, Alphabet and Meta Platforms drove 34% earnings growth in the communication services sector.3 Alphabet reported strong sales from its search, YouTube and Google Cloud business segments. Meanwhile, Meta benefited from accelerating revenue growth while its sales and marketing costs fell. Excluding these behemoths, the sector's growth rate would have been less than 2%.4

As shown in Figure 1, the energy, health care and materials sectors were earnings weak spots in the U.S. during the first quarter.

Figure 1 | Communications Services and Utilities Turned in the Strongest First-Quarter Results

Bar chart showing year-over-year earnings per share growth by sector. Communication Services, Utilities and Consumer Discretionary each grew by over 30% in Q1 2024, while Materials, Energy and Health Care each declined by over 20%.

Data as of 5/17/2024. Source: FactSet.

Results in Europe Were Negative but Better Than Expected

Though European earnings growth was negative, first-quarter results came ahead of analysts’ expectations.

On the positive side, financials and health care companies posted Europe’s strongest profit growth.5 Among financials, banks contributed the most. This includes BNP Paribas, which outperformed expectations as lower costs and strong global banking performance helped counter a sharp decline in its fixed-income trading business.

Strong pharmaceutical company results drove the health care sector. Novo Nordisk reported that sales of the weight-loss drug Wegovy more than doubled. AstraZeneca also turned in strong results, fueled by a 26% jump in sales of its oncology drugs.

Energy and industrial companies were the weakest performers, but their profits held up better than analysts predicted.

Three Trends We’re Watching

1. Consumers Pushing Back on Higher Prices

Earnings reports from companies such as Starbucks, McDonald's, Coca-Cola and Mondelez all noted an increasingly challenging environment, particularly for lower-income consumers. After years of increasing prices without much pushback, it appears many consumers may have finally had enough.

Companies have noted that their customers have shifted their spending patterns toward cheaper private label options or restaurants where they feel they are getting a better value.

“We see in our (product) categories, the elasticity is really going up. Penetration is still pretty good, but people are much more conscious about price points. The frequency (of purchases) is coming down, particularly with the lower-income consumers. And particularly, the brands that are important for them, like Chips Ahoy! (We) can see that they’re losing some market share to private label.”

Dirk Van de Put, CEO – Mondelez

2. Are Magnificent Seven Profits Coming Back to Earth?

After dominating throughout 2023 and early 2024, we see indications that profit growth for the seven largest companies in the S&P 500® Index could cool as the year progresses. Financials for the so-called Magnificent Seven stocks again dwarfed the market in the first quarter, but analysts forecast a slowdown in their earnings growth in the coming quarters.

At the same time, the street expects continued improvement in the index’s other 493 companies. See Figure 2. Though these are only forecasts, and the economic backdrop remains uncertain, analysts estimate the pack could overtake the Mag 7 by the fourth quarter.

Figure 2 | Can The Pack Overtake the Mag 7 by Year-End?

Bar chart showing year-over-year earnings per share growth for the Magnificent 7 and the S&P 500 excluding the Magnificent 7. The Mag 7 outperformed in 2023 and is expected to outperform each quarter of 2024 until Q4.

Data from 1/1/2023 – 4/30/2024. Source: FactSet. Forecasts are as of 4/30/2024 and are subject to change.

3. AI Is Hitting the Bottom Line

AI value chain activity ranges from foundational elements such as data collection and model training to building platforms and infrastructure and final deployment. The Mag 7 isn’t alone in riding this wave, as the technology has become a material contributor to growth for many companies.

During the first quarter reporting season, management teams discussed how integrating AI models into new products and services opens market opportunities and drives additional productivity improvement for customers.

“On the customer experience side, we made significant strides in the integration of AI within our accommodation business. Now, we offer condensed reviews, empowering our customers with crisp summaries. This enhancement enables swift property selection and furnishes instant insights into each property's offerings.”

Rajesh Magow, CEO, MakeMyTrip

“In terms of Generative AI, we keep investing in solutions. We launched a new platform a few weeks ago to allow our clients to experiment with industry-specific use cases and to industrialize them at a controlled cost.”

Aiman Ezzat, CEO Capgemini

Analysts Estimate Positive Full-Year Profit Growth for All Regions

Not every company provides a forward-looking perspective, but 59% of companies that have issued guidance provided lower-than-expected forecasts. This is in line with the five-year average and an improvement compared to 69% last quarter.6

Looking out to the full year, analysts expect profit growth to be in positive territory across the board. In the U.S., analysts believe stabilizing input costs and easier comparisons to last year’s performance will result in 5% earnings growth compared to last year.7

In Europe, forecasters believe profits will continue to improve and land firmly in the black at 5.6% for the year. Estimates call for robust 9% earnings growth in Japan and nearly 15% growth in emerging markets.8

Jonathan Bauman, CFA
Jonathan Bauman, CFA

Vice President

Senior Client Portfolio Manager

Amanda Rehmann, CIMA

Amanda Rehmann, CIMA

Associate Client Portfolio Manager

Learn More About Our Global Growth Strategies

We focus on investing in companies with accelerating growth characteristics and earnings power.

Source: FactSet as of 5/17/2024.

Source: FactSet as of 5/21/2024.

Source: FactSet as of 5/17/2024.

Source: FactSet as of 5/17/2024.

Source: FactSet as of 5/21/2024.

Source: FactSet as of 5/17/2024.

Source: FactSet as of 5/17/2024.

Source: FactSet as of 5/21/2024.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

The information is not intended as a personalized recommendation or fiduciary advice and should not be relied upon for, investment, accounting, legal or tax advice.

References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

No offer of any security is made hereby. This material is provided for informational purposes only and does not constitute a recommendation of any investment strategy or product described herein. This material is directed to professional/institutional clients only and should not be relied upon by retail investors or the public. The content of this document has not been reviewed by any regulatory authority.