Wed, October 16, 2024 | 7:45AM ET

3Q24 EPS season: inflation falls by half, yet "real" revs growth accelerates. 3 reasons this is positive. Newton warns market technicals less attractive in November.

Tom Lee, CFA ^AC

Head of Research

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3Q24 EPS season: inflation falls by half, yet real revs growth accelerates. 3 reasons this is positive. Newton warns market technicals less attractive in November.

VIDEO: third-quarter earning season is delivering better quality results than many realize because real revenue growth is accelerating. Also, Mark Newton is warning that technicals are showing markets could be stalling in November (Duration: 6:19).

For the first time since late August, Mark Newton, our Head of Technical Strategy, sees risk/reward for stocks deteriorating through mid-November. He discusses this at length in his note (and discussed below), but this is a change from his technical view for the past 6 weeks, so it is noteworthy:

Newton (see slide), sees technical factors:
– waning breadth and momentum (MACD, RSI)
– divergences/ non-confirmations of transports, QQQ
– technical indicators DeMark, elliotwave, etc
And complacency risks:
– very low equity put-call <0.45
– high bull readings AAII
– seasonality as Oct typically bad in election year, etc
And as a result, he thinks there is high risk of -5% to -7% into mid-November (past election day). This could be choppy near-term so a “double top”-type rally next few weeks, but he would be cautious of such a move. In any case, this comes in the context of markets being in the “tricky” period from Sept to election day.
But we also know this has been a strong market, with a seeming underlying bid. So we expect investors to “buy the dip” and even if this dip is more painful (-5% to -7%), this is congruent with S&P 500 showing strength post-election into YE. And as we noted previously, median 2H gain is expected to be +9.8%, implying S&P 500 6,000 by year-end.
We are still early in 3Q24 earnings season and it has been very good, in our view. The standout is that revenue growth is tracking +5%, consistent with 4% to 6% growth for each of the past 5 quarters.
The reason this is notable is that “core inflation” has fallen like a rock from 7% 3Q22 to 3% 3Q24. So, inflation has fallen by more than half in the past 8 quarters, yet revenue growth has held steady at 4% to 6%.
This would seem incongruent. After all, recall how the bearish take was that if inflation fell from 2022 levels, then S&P 500 earnings would tank because top-line growth would fall off a cliff (“nominal”) but that has not been the case.
There are 3 ways to interpret this, and each of the 3 is positive for stocks:
– core inflation did not reflect true inflation in the economy
– S&P 500 revenue growth not correlated to inflation
– S&P 500 companies are “outperforming” inflation
Take your pick, since we will not know why S&P 500 revenue growth held steady despite a tanking of inflation. But this means that “real” revenue growth is accelerating:
– “real” is S&P 500 revs less core CPI
– 2Q23 –> -3.4%
– 3Q23 –> -1.9%
– 4Q23 –> +0.2%
– NOW –> +2.0%
That is a huge swing and implies that the quality of 3Q24 EPS growth is stronger than a year ago. Perhaps this explains why stocks are so strong in 2024.
The other reason stocks may be strong recently, is the 2024 Presidential election may be less of a “coin toss” than polls suggest. We have extensive slides below, but the 2 things to note:
– Nate Silver election model (“gold standard”) shows 50/50 now
– but never this 50/50 in 2016 or 2020
– betting markets show Trump pulling far ahead of Harris
– this was not the case at this exact time in 2016 or 2020
As shown below, Nate Silver model showed a 72% spread in Oct 15th of 2016 and 2020. So it never showed an election this tight. And by the way, in 2016, his model showed Trump losing by 72% spread vs Clinton. But in 2024, this is 50/50. So, this shows Trump is probably stronger in 2024 compared to 2016 and 2020.
There is $2 billion wagered in polymarkets and shows Trump at 58%. But it is not just polymarket.com as realclearpolling.com shows 7 betting markets averaging Trump at 56%. Tom Block, our head of policy strategy, warns betting markets are not the same as voter ranks. And so, this is something to be mindful of.
We do not believe stock markets care if Trump or Harris wins. Equities should perform well under the next President.
However, there are sectoral implications. And as we noted, the following are positively leveraged to a Trump victory:
– Small-caps: IWM IJR
– Cyclicals: XLF KRE XLI
– Bitcoin: BTC MSTR SMLR
In recent weeks, each of these 3 has rallied. So, it does seem like equity markets are leaning towards a Trump victory.

Bottom line: We are still in the “tricky” period, but in the context of a very strong market

We expect dip buyers to emerge if we get any pullback. 3Q24 EPS season is supportive of fundamentals.

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Key incoming data October:

~~10/1 9:45 AM ET: Sep F S&P Global Manufacturing PMI~~ Tame
~~10/1 10:00 AM ET: Sep ISM Manufacturing PMI~~ Tame
~~10/1 10:00 AM ET: Aug JOLTS Job Openings~~ Tame
~~10/3 9:45 AM ET: Sep F S&P Global Services PMI~~ Tame
~~10/3 10:00 AM ET: Sep ISM Services PMI~~ Mixed
~~10/3 10:00 AM ET: Aug F Durable Goods Orders~~ Tame
~~10/4 8:30 AM ET: Sep Non-Farm Payrolls~~ Hot
~~10/7 9:00 AM ET: Aug F Manheim Used Vehicle Index~~ Tame
~~10/8 6:00 AM ET: Sep Small Business Optimism Survey~~ Tame
~~10/8 8:30 AM ET: Aug Trade Balance~~ Tame
~~10/9 2:00 PM ET: Sep 18 FOMC Meeting Minutes~~ Dovish
~~10/10 8:30 AM ET: Sep CPI~~ Hot
~~10/11 8:30 AM ET: Sep PPI~~ Tame
~~10/11 10:00 AM ET: Oct P U. Mich. Sentiment and Inflation Expectation~~ Tame
~~10/15 8:30 AM ET: Oct Empire Manufacturing Survey~~ Tame
~~10/15 11:00 AM ET: Sep NY Fed 1yr Inf Exp~~ Tame
10/17 8:30 AM ET: Sep Retail Sales Data
10/17 8:30 AM ET: Oct Philly Fed Business Outlook
10/17 9:00 AM ET: Sep M Manheim Used Vehicle Index
10/17 10:00 AM ET: Oct NAHB Housing Market Index
10/17 4:00 PM ET: Aug Net TIC Flows
10/23 10:00 AM ET: Sep Existing Home Sales
10/23 2:00 PM ET: Oct Fed Releases Beige Book
10/24 8:30 AM ET: Sep Chicago Fed Nat Activity Index
10/24 9:45 AM ET: Oct P S&P Global Manufacturing PMI
10/24 9:45 AM ET: Oct P S&P Global Services PMI
10/24 10:00 AM ET: Sep New Home Sales
10/25 10:00 AM ET: Oct F U. Mich. Sentiment and Inflation Expectation
10/25 10:00 AM ET: Aug F Durable Goods Orders
10/28 10:30 AM ET: Oct Dallas Fed Manuf. Activity Survey
10/29 9:00 AM ET: Aug S&P CoreLogic CS home price
10/29 10:00 AM ET: Oct Conference Board Consumer Confidence
10/29 10:00 AM ET: Sep JOLTS Job Openings
10/30 8:30 AM ET: 3Q A 2024 GDP
10/30 10:00 AM ET: 3Q24 Treasury Quarterly Refunding Press Conference
10/31 8:30 AM ET: Sep PCE Deflator
10/31 8:30 AM ET: 3Q Employment Cost Index

Economic Data Performance Tracker 2024:

Economic Data Performance Tracker 2023:

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