RESEARCH – 24 October 2024
Goldilocks and the Three Market Trends Shaping Q3 2024
Earnings, AI Adoption, Price Stability Take Center Stage
By Frank Zhao and Mengmeng Ao
Q2 2024 marked the light at the end of the tunnel. Inflation fears subsided, and the economy stabilized. Deflation concerns and contraction risks appeared to be under control. Sentiment across S&P 500 firms hovered at a 15-year high. As the Q3 earnings season commences, key market trends to monitor are: i) Will the overall sentiment continue to hover at a 15-year high? ii) Can firms meet the robust financial outlook from the Q2 earnings season? iii) Will AI deliver the promised economic boost, or will geopolitical unrest and exogenous shocks -- such as the ILA port strike and its temporary postponement[1] -- take the U.S. economy on a detour from entering a Goldilocks state? How the Q3 earnings season unfolds is pivotal, as it will reinforce the outlook that the U.S. economy is growing with price stability or reveal cracks in the premise.
Exhibit 1: Percentile Ranks of S&P 500 Overall Sentiment | Q3’09 – Q2’24
Key Findings:
- Sentiment Level and Economic Outlook: With sentiment nearing a 15-year high due to steady economic growth and the commencement of Federal Reserve’s easing cycle, it is crucial to assess whether this sentiment continues to hover near all-time highs as the new earnings season unfolds -- particularly in relation to inflationary (and deflationary) trends, the upcoming U.S. general election, and geopolitical unrest in the Middle East.
- Financial Actuals Versus Guidance: In Q2 2024, firms provided strong financial guidance for Q3, particularly regarding earnings and profitability. Monitor whether firms are meeting, exceeding, or falling short of these expectations, as this could indicate sustained economic momentum or emerging challenges.
- AI Adoption Across Industries: Track the resurgence of AI discussions during earnings calls. After experiencing mild fatigue in Q2, monitor how companies across the various sectors -- particularly non-tech industries -- are incorporating generative AI into their operations and strategies, and whether this trend is accelerating.
- Inflation & Price Stability: For now, and likely to the Fed’s chagrin, appropriate monetary policy changes remain a focal point. If inflation and Fed policy stabilize, they may become less meaningful determinants of the market’s future direction. Exogenous factors, however, such as the ILA port strike and its temporary postponement, should be monitored for their potential impact on supply chains, inflation, and costs. A prolonged disruption could reintroduce inflationary pressures and challenge the optimistic outlook, especially for industries reliant on shipping and logistics from East Coast ports.
[1] Extended the existing contract to January 15, 2025, on October 3, 2024. https://www.cnbc.com/2024/10/03/port-strike-ends-as-workers-agree-to-tentative-deal-on-wages-and-contract-extension.html