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U.S. Equities
3 investment ideas from earnings season
Anne-Marie Peterson
Equity Portfolio Manager
Thatcher Thompson
Portfolio Manager/Analyst
Beth Schulte
Equity Investment Analyst

Quarterly earnings for most companies in the S&P 500 Index have exceeded expectations. Businesses continue to cut costs, pass on price increases to consumers and find new areas of growth.


As long-term investors, we look far beyond quarterly earnings, but we also pay close attention because they can reflect underlying trends. Furthermore, sharp declines in equity or debt post-earnings may offer attractive entry points.


Against that backdrop, here are three investment ideas we’re tracking.


Investors revised 2024 and 2025 earnings expectations higher

The bar chart above shows two earnings estimates for first-quarter 2024, 2024, and 2025. The first estimate is prior to first-quarter earnings released, or March 31, 2024, and the second estimate is the current estimate, after most S&P 500 companies released first-quarter earnings. For first-quarter 2024 prior estimates it was 3.0% year-over-year earnings growth versus current estimates of 5.4% year-over-year earnings growth. For full-year 2024 prior estimates it was 10.6% year-over-year earnings growth versus revised estimates of 10.9% year-over-year earnings growth. For full-year 2025 prior estimates it was 13.4% year-over-year earnings growth versus revised estimates of 13.9% year-over-year earnings growth.

Sources: Capital Group, FactSet. Earnings growth refers to annual change in earnings per share. As of May 14, 2024.

1. A new industrial revolution requires picks and shovels


Increased power demand from artificial intelligence combined with government incentives to rebuild infrastructure are paving the way for a new industrial revolution, says Anne-Marie Peterson, portfolio manager for CGGR Capital Group Growth ETF and principal investment officer for The Growth Fund of America®.


And with construction underway on only 16% of the roughly $1.2 trillion North American projects announced since 2021, outsized growth should continue in the ensuing years, according to executives at power management company Eaton during its earnings call. That figure only considers projects over $1 billion.


For its part, Eaton raised 2024 earnings expectations and specifically highlighted stronger than expected growth for data centers from so-called hyperscaler companies like Amazon and Google that provide cloud computing and data management services. Eaton’s electrical sector had a backlog of $11.3 billion in the first quarter of 2024, a figure that has grown steadily from the $2.8 billion it disclosed in the fourth quarter of 2019.


Eaton is just one example of a pick-and-shovel company that is well positioned to take advantage of the buildout of data centers, roads, water and energy systems, says Peterson. Others include machinery manufacturer Caterpillar, which reported during the quarter that its division that includes products for data centers outsold products for construction industries.


Energy demand may power a new industrial revolution

The line chart shows worldwide electricity demand in annual percentage change from 2019 to 2025. In 2019 demand for electricity rose 1.3%, while in 2020 it declined 0.8% and rose again 5.7% in 2021. The forecast for 2023 is for demand for electricity to increase 2.6%, while the forecast for 2024 is 3.1% and the forecast for 2025 is 3.3%.

Sources: Capital Group, International Energy Agency: "Electricity Report 2023." Latest figures available as of May 15, 2024.

2. Streaming leader pulls ahead as industry reaches new phase


Netflix’s crackdown on password sharing delivered millions more subscribers and higher revenue. It also showed Netflix has a strong foothold against tech and media giants hoping to encroach on the company’s business, according to Thatcher Thompson, portfolio manager for SMALLCAP World Fund®.


Netflix’s crackdown on password sharing worked

The bar chart reflects paid Netflix subscribers in millions on the left axis. It also includes a horizontal line reflecting the average monthly revenue per subscription in U.S. dollars for Netflix on the right axis. The years shown are quarterly periods from 2021 to 2024. For the first quarter ended March 2021, there were 74 million paying subscribers at a monthly rate of $14.25. By December 2021, there were 75 million paying subscribers at a monthly rate of $14.78. For the first quarter ended March 2022, there were 75 million paying subscribers at a monthly rate of $14.91. By December 2022, there were 74 million paying subscribers at a monthly rate of $16.23. For the first quarter ended March 2023, there were 74 million paying subscribers at a monthly rate of $16.18. By December 2023, there were 80 million paying subscribers at a monthly rate of $16.64. For the first quarter ended March 2024, there were 83 million paying subscribers at a monthly rate of $17.30.

Sources: Capital Group, Netflix quarterly earnings reports. As of March 30, 2024.

Nevertheless, Netflix’s stock declined after it disclosed in an earnings report plans to stop reporting subscriber growth in 2025. “Investors are so focused on subscriber count that they don’t think of much else,” says Thompson. “But metrics such as pricing opportunities, international growth and a streamer’s advertising platform may be more important for the industry going forward.”


The streaming war is far from over. Consolidation will continue as streamers seek to build scale. Longer term, we expect streaming leaders to become bigger players in video games and sports.


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3. Olympic-sized opportunity: Young brands could upset legacy sportswear giants


The Olympics is the world’s stage for athletic dominance. It’s also a high-pressure event for athletic brands to debut innovative products and grab market share.


“Smaller footwear brands such as Hoka and On have given legacy brands some competition lately. They’ve taken market share, and the upcoming summer Olympics serves as a backdrop for smaller brands to cement their status as credible opponents,” says equity analyst Beth Schulte.


The shift in sportswear is the result of factors ranging from pandemic-era supply chain issues that slowed the pace of innovation to upstart brands’ ability to harness the power of social media to go viral and scale quickly. There is also a natural fashion cycle as certain brands tend to move in and out of fashion, Schulte reports.


Recent first-quarter earnings reports show just how high the stakes are. Several larger companies have lowered guidance as they reset to find a base from which they can grow again. It will be important for legacy brands such as Nike and Adidas to re-establish their reputation as leading performance athletic brands.


Part of the reset includes increased investment in product innovation and marketing spend. “Nearly every major brand has put extra advertising dollars into the event, but it may be 12 to 18 months after the Olympics before investors know whether legacy brands will continue to lose ground,” Schulte says.


Let the games begin.


Meeting the challenges of high rates


The strong start to earnings season bodes well for many companies. Themes such as artificial intelligence and the resulting high capital expenditures spend from hyperscalers continue to resonate. There are signs that lower-to-middle income consumers are feeling stretched, which could impact certain companies as the year progresses.


“When it comes to investment decisions, I like to focus on specific companies rather than trying to read macroeconomic tea leaves. However, quarterly earnings do provide insights into how companies and consumers are handling high interest rates and other economic challenges,” Thompson concludes.



Anne-Marie Peterson is an equity portfolio manager with 29 years of investment experience (as of 12/31/2023). She holds a bachelor’s degree in economics from the University of California, Irvine. She is also a CFA® charterholder.

Thatcher Thompson is an equity portfolio manager with 31 years of investment experience (as of 12/31/2023). He also holds the Chartered Financial Analyst® designation. Thatcher is based in San Francisco.

Beth Shapiro Schulte is an equity investment analyst with 20 years of investment experience as of 12/31/2023. She holds an MBA from Harvard and a bachelor's in economics from the University of Pennsylvania.


S&P 500 Index is a market capitalization-weighted index based on the results of approximately 500 widely held common stocks.

 

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