Resilient earnings growth to support equity returns and sector rotation

Highlights:

• Starting from Q3 2023, the US annual earnings growth momentum has been satisfactory, only slightly below the 10-year average (8.6% yoy vs 10.1%), supported by robust US economic growth. Analysts expect the Q2 2024 reporting season to show higher growth versus Q1 and better relative ex-US tech momentum, including the riskier EMU stocks..  
• So far, the first US 180 firms have shown moderate earnings surprises. That said, this time US Q2 earnings estimates have been hardly revised down before the season started (+3pp better revisions vs historical average since 2011), so positive surprises are less probable. Political risk and softer macro could also affect guidance, though the latter has so far looked better than in Q1 for earlier reporters. 
• Supported by our earnings models, we see 2024 earnings growth at 9% for the US and 7.5% for the EMU. For the latter, we are currently 4pp above consensus. We will probably have to make slight adjustments to the downside, due to following headwinds: French politics, trade frictions, and bumpy recovery overall. For 2025, we see 9% growth for US and 5% for EMU, below consensus by 5pp and 1pp, respectively. 
• Judging by different macro indicators, US margins seem to be relatively safe near term. Moreover, corporate Cash Flow minus Capex spread remains very high, with net equity issuances very low and buybacks high. This translates into a positive medium-term technical picture for the market, which also supports our slight OW position in equities. 
• In the short term, however, we do not exploit a bolder OW position due to rising risks: toppish ISM momentum, negative macro surprises, high US PE, declining banks’ liquidity, and higher investor positioning. Over 12 months, we still expect positive total returns (TR) of 4% in the US and 7.0% for the EMU due to the decent earnings growth, ex-US valuations which remain fair-to-attractive, and more accommodative central banks.

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