Despite positive earnings news, the deteriorating macroeconomic environment remains a significant concern, according to Barclays analysts.
In their latest note, Barclays observed that "2Q24 earnings has been mostly good news but not enough to shrug off deteriorating macro."
The bank explained that the breadth of earnings per share (EPS) beats and year-over-year growth trends were strong, with "81% of S&P 500 companies reporting have beaten the consensus estimate, vs. 76% long-term trend."
Meanwhile, year-over-year EPS growth is said to be tracking modestly better than the long-term trend at +9.8%, making 2Q24 the fourth consecutive quarter of positive operating leverage.
Additionally, Barclays says next twelve months (NTM) EPS continues to move higher, revised up +25% year-to-date for Big Tech and +6% for the rest of the S&P 500.
However, Barclays cautions that "the good news" might not be enough. They note that the average beat has weakened since last quarter across nearly all sectors.
Approximately half of the S&P 500 sectors are still experiencing profit margins flat to slightly down year-over-year, according to the bank.
Furthermore, 3Q24 estimates have been sharply revised down, particularly in Healthcare, Energy, and Industrials.
Barclays highlights that "Big Tech is in the penalty box this season" due to shrinking EPS surprises, decelerating earnings growth, and rising capex concerns.
Despite the selloff leaving Big Tech shares trading at a more reasonable multiple, the high bar set for these stocks and investor fears around the AI capex and depreciation cycle persist.
Overall, Barclays notes that earnings have done little to offset macro concerns, as evidenced by last week's market moves showing a preference for de-risking, with volatility and small-cap stocks taking a hit while defensives outpaced cyclicals. They suggest that "small-cap outperformance has run its course," although they see potential in the broadening within large-caps.