Learnings from Earnings
A Look Back at 4Q 2024 Earnings
Earnings releases for the fourth quarter of 2024 highlighted the overall healthy state of the corporate sector. S&P 500 earnings grew by 18% year-on-year,1 significantly exceeding already high expectations. Earnings growth was consistent both at the aggregate index level and for the median constituent, marking a notable improvement from the previous quarter. Approximately 2/3 of companies “beat” EPS expectations.2 Corporate optimism surged to its highest point since early 2021, with 52% of companies expressing positive sentiment during earnings calls. This was further supported by increased mentions of "better" and "stronger" compared to "worse" and "weaker."
However, the scale of downward revisions to 2025 estimates is a clear change from the consistent upward revisions that have characterized the last several quarters. We believe it is possible that companies are guiding conservatively amid continued macro and policy uncertainty, but this still warrants caution. Furthermore, a stronger US dollar is weighing on the non-US sales of companies, acting as a headwind to overall sales and earnings estimates.
We expect the fundamentals of the S&P’s 493 constituents (S&P 500 ex. Magnificent 7) to improve in 2025, driven by a cyclical rebound in manufacturing. Moreover, nearly 30% of companies are expected to outpace the Magnificent 7’s EPS growth by 3Q 2025 versus the lows of 8% in 3Q-4Q 2023. Broadening EPS growth should lead to market performance broadening out, in our view. Overall, consensus estimates now point to a healthy—albeit no longer accelerating—double-digit pace of EPS growth in 2025.
US Consumer: Confidence Despite Persistent Pressures
Data from Mastercard and Visa, corroborated by American Express's CEO who stated, "I think we’re seeing more consumer confidence…sentiment is really, really good, and it’s higher than it’s been in a long time,"3 showcases this strength. The consumer discretionary sector is booming, particularly in high-end spending. Travel and accommodation surpassed pre-pandemic levels, with Hilton's CEO, Chris Nassetta, expressing optimism for short-to-medium-term economic growth despite acknowledging short-term challenges. He noted that "the opportunity for economic growth in the short to intermediate term will be better."4
Leisure travel remains exceptionally strong, exceeding pre-pandemic levels. Royal Caribbean Cruises reported the best 5-week booking period in the company’s history, reflecting robust demand and higher pricing.5 Business travel is also recovering, further bolstering the positive trend.6 The global luxury market has experienced a significant rebound, with the US leading the charge and China showing stabilization. Brunello Cucinelli and Richemont's results highlight this positive shift, indicating an expansion of luxury demand to aspirational consumers.7 While most regional luxury players showed positive sales growth, the key debate centers on the sustainability of this growth and the extent of the aspirational consumer's rebound through 2025.
However, this positive narrative is counterbalanced by the struggles of lower-income consumers. Walmart’s earnings update emphasized continued focus on value and convenience purchases, reflecting persistent economic pressures. The consumer staples sector is grappling with inventory destocking, impacting major players like P&G, Colgate, and General Mills. The beauty sector is underperforming, with European giants like Nestlé experiencing weak demand from lower-income US consumers. A strong US dollar further exacerbates challenges for multinational consumer staples companies. The University of Michigan Consumer Sentiment Index reflects growing concerns, with January and February readings reaching their lowest point since July of the previous year due to renewed inflation concerns and tariff uncertainty.8 This decline in sentiment was widespread across demographics and political affiliations, with both short-term and long-term inflation expectations rising.
AI Ecosystem Investments and Increasing AI Use Cases
Robust AI sector investment continues despite concerns that recent advancements like DeepSeek's innovative model training methods may lead to a reduction in hyperscalers’ planned capex. Major players such as Meta, Amazon, and Google have publicly committed to substantial capital expenditures for 2025, totaling hundreds of billions of dollars. These significant investments highlight the intense competition for AI dominance. Meta reiterated its increased capital expenditure (capex) plans of $60-65 billion, a significant rise from previous years.9 Similarly, Amazon guided towards approximately $100 billion in capex, representing a ~30% year-over-year increase.10 Google's announced a 43% increase in capex to $75 billion.11 These figures underscore the significant financial commitment these companies are making to the AI sector. While DeepSeek's technology offers the potential for significant cost reductions in AI development and deployment, its impact on the overall trajectory of capital expenditure in the development of frontier models is likely to be minimal. DeepSeek's approach, which emphasizes reasoning over supervised learning, complements existing frontier models like Llama and those offered by OpenAI, rather than replacing them. Consequently, the primary beneficiaries of DeepSeek's innovation are anticipated to be companies building AI applications and those creating innovative consumer-facing AI products.
The expanding adoption of AI across diverse sectors further fuels this substantial investment. Examples include automating tasks such as communicating flight delays and managing re-bookings, accelerating the interpretation of complex labor contracts, and the development of sophisticated virtual assistants like Delta Concierge. These applications demonstrate the growing versatility and efficiency gains offered by AI across various industries.
The contrasting performance of AMD and Nvidia provide further insight into the strategic importance of securing access to high-performance computing resources in the AI race. Nvidia's continued strong growth (with margins slightly down this quarter due to the rollout of Blackwell), in stark contrast to AMD's disappointing guidance, suggests to us that hyperscale companies are either favoring Nvidia's GPUs or investing heavily in developing their own application specific integrated circuits (ASICs), often with the assistance of companies like Broadcom and Marvell.
Meta's increased investment in ASICs for both inference and training workloads reinforces this trend towards internal development and control over crucial computing infrastructure. The market's reaction to these announcements has been varied, underscoring the importance of clear and transparent communication regarding strategic investments. Meta's proactive communication was rewarded positively, while Google's less transparent approach led to a negative market response. The continued aggressive investment in AI, despite the emergence of efficiency-enhancing technologies like DeepSeek, suggests a long-term commitment to the sector and a belief in its transformative potential across various industries.
Green Shoots of Recovery for Industrials
Earnings in 4Q 2024 highlighted a mixed bag for industrials. Despite no dramatic changes, several positive indicators suggest a potential turning point. Many companies reported results that met or exceeded expectations, although guidance generally remained in line with or slightly below consensus. This cautious approach reflects a lingering hesitancy following a prolonged downturn. 60% of companies reported in-line or better results, indicating a degree of stabilization, though not necessarily robust growth.
Certain sectors are exhibiting more pronounced signs of recovery. Companies operating in the power and aerospace aftermarket (i.e., providers of maintenance and repair services) posted accelerating orders, indicating overall robust economic health. Healthy cash flow and strong balance sheets are fueling increased capital expenditures in key sectors such as electrical power, and metal production. The aerospace industry in particular is showing signs of improvement following recent labor shortages. Manufacturers are proactively hiring, suggesting increased confidence in future demand.
In Asia, we note strength in electronics manufacturing, potentially influenced by tariff avoidance strategies. Other pockets of strength included bioprocessing, liquid cooling, and European heat pumps. The construction market also showed growth, with non-residential construction up 7%, residential up 9%, although infrastructure projects experienced a decline of 6%. This uneven performance highlights the continued challenges facing the sector. Elsewhere, a significant shift in sentiment is evident among shipping companies. Increased optimism and a willingness to declare the bottom of the cycle suggest a positive outlook for industrial freight.
Looking Ahead
Early 2025 witnessed a pick-up in M&A and IPO activity, but the momentum in “animal spirits” has been dampened by economic uncertainty, stricter immigration policies, and particularly, the new tariff regime. Most companies are adopting a cautious "wait-and-see" approach regarding tariffs, though retailers, having diversified sourcing since 2018-2019, appear better prepared. We see many companies employing a three-pronged strategy: negotiating supplier costs, shifting sourcing, and selectively raising prices. The prevailing approach seems to be to fully pass on any tariff-related cost increases to consumers. Importantly, most companies haven't yet factored tariff impacts into their 2025 guidance. Tariff uncertainty may significantly influence company strategies and outlooks. The strengthening US dollar could partially offset tariff pressures. Consumer sentiment, as reflected in the University of Michigan Consumer Sentiment Index, has also declined to its lowest point since July 2024, driven by inflation and tariff concerns. This decline is widespread across demographics and political affiliations, with both short- and long-term inflation expectations rising. We will closely monitor these evolving economic headwinds and their potential impact on corporate profitability.
Spotlight: Broadening Returns and Boosting Resilience with International Income
As part of our 4Q 2024 Learnings from Earnings, we sat down with Abhishek Periwal, co-portfolio manager for International Equity, to discuss equity market catalysts, broadening returns and potential ways to boost portfolio resilience with income from international equities.
Considering the historical performance of the S&P 500, why should US investors consider diversifying into international equities?
While the S&P 500 has delivered strong annualized returns of 13% in the past decade, future returns are unlikely to match this level. Relying solely on domestic equities can expose investors to country-specific risks, including economic downturns, regulatory changes, or political uncertainty. We have seen a lot of volatility in the last couple of months in the US market, including a sell-off in large technology names that had driven most of S&P 500 returns in the previous two years. The MSCI EAFE Index has outperformed the S&P 500 by almost 9% year-to-date.12 Diversifying into international equities can potentially mitigate risks associated with domestic market fluctuations and provide access to growth opportunities in diverse economies and industries. A globally diversified portfolio potentially enables investors to leverage these differences to smooth performance, enhance downside resilience, and capture returns when certain regions outperform others. Importantly, in developed markets outside the US, we find many financially strong and globally competitive companies which are likely to do well across time horizons. Both in Europe and in Japan, there are pockets of opportunity where active, well-researched stock pickers can add significant value.
What are some specific catalysts and structural growth drivers that make international markets attractive right now?
International markets are potentially benefitting from near term catalysts and long-term structural growth drivers. In Europe, the economic outlook is improving, supported by a mode accommodating monetary policy, with the European Central Bank having cut rates six times since June. A weaker euro may potentially benefit the region’s exporters, who make up a significant part of the stock market. With the change in the German government’s stance towards fiscal policy we may soon see an unprecedented stimulus package which may have wide-ranging positive repercussions for the European economy. Potential further catalysts include a resolution to the Ukraine conflict and clearer US trade policy. The Japanese market offers compelling long-term opportunities due to corporate governance reforms, the end of the deflationary environment, and wage growth boosting growth in domestic Japanese economy. Despite the recent outperformance and improved outlook, the MSCI EAFE is still trading at a ~30% discount to the S&P 500, a discount twice as steep as its 20-year average.13 Investors seem to be recognizing the opportunity and urgency to diversify as international equity funds have garnered ~$32 billion in flows YTD, with one of the strongest periods of inflows over the last 5 years.14
How do international equities enhance the return for investors compared to solely focusing on US equities?
Historically, companies in international markets have exhibited a strong commitment to distributing dividends back to shareholders. This long-established practice has resulted in higher dividend upside and higher dividend yield, often surpassing those of US stocks. The MSCI EAFE has seen dividends account for nearly 70% of its cumulative total returns in the last 20 years. Additionally, share buybacks are growing as a source of shareholder returns outside the US. In Europe, buybacks have historically accounted for around 20-25% of total shareholder return; their contribution has now increased to nearly 35%. European companies sit on significant amounts of cash and are expected to return €500bn to shareholders via dividends and buybacks through to the end of 2025, implying a 5% shareholder yield, close to an all-time high.
How might international equity investments expand portfolio opportunities?
Differences in sector composition between US and international indices provide opportunities to tap into niche areas and access innovative business models that may be at a different stage of maturity that in the US. Within international equities, sectors such as Financials, Utilities and Consumer Staples provides differentiated exposure to the “growthy” S&P500 and tend to provide a steady income stream through dividends, enhancing overall portfolio stability.15 International equities also offer exposure to leading companies across various sectors. For example, in Semiconductors, more than 75% of total semiconductor manufacturing capacity lies outside of the US; in Luxury Goods, Europe accounts for around 2/3 of all sales of luxury products; in Infrastructure, the MSCI EAFE Index offers over ~2x more exposure to publicly listed infrastructure names than the US. Some of European Healthcare companies are world leaders in areas such as obesity drugs; the GLP-1 receptor a market is expected to exceed $100 billion by 2030.16
Top performing stocks in global indices often come from international markets. For example, over 70% of the top quartile performers in MSCI ACWI in 2024 were non-US names.17 Irrespective of market conditions, thoughtful stock selection in international equities can provide exposure to potential beneficiaries across industries.
1 FactSet Insight, as of February 27, 2025
2 FactSet Insight, as of February 27, 2025
3 American Express Company. As of January 25, 2025.
4 Hilton. As of February 6, 2025.
5 Royal Carribean Cruises. As of January 28, 2025.
6 World Travel & Tourism Council, “2024 Economic Impact Trends Report”, October 2024. The report revealed that business travel is set to surpass pre-pandemic levels in 2024, to reach a record US$1.5 trillion.
7 Brunello Cucinelli preliminary revenues report, released on January 13, 2025; Richemont press release on the results for the quarter ending December 31, 2024, on January 16, 2025
8 http://www.sca.isr.umich.edu/
9 Meta Platforms. As of January 29, 2025
10 Amazon.com. As of February 6, 2025.
11 Alphabet. As of February 4, 2025
12 MSCI, FactSet as of March 14, 2025.
13 MSCI, FactSet as of March 14, 2025.
14 JP Morgan EM Money Trail as of March 7, 2025
15 The US large cap market as defined by S&P 500 has higher growth than value characteristics compared to the European large cap market.
16 Source: Goldman Sachs Global Investment Research. As of April 12, 2024.
17 This timeframe includes January 1, 2024 to December 31, 2024.
