Q2 earnings season came to an end with NVDA’s report yesterday
These days, earnings season isn’t over until Nvidia reports (which they did last night) because it’s the bellwether of the AI trade. Today, we’re going to look at the major themes of Q2 earnings season, starting with AI:
1. Investors were concerned about the infrastructure investment costs of AI
AI and the related investment costs for “hyperscalers” (MSFT, GOOG, META, AMZN) was one big theme this quarter, since investors want to be sure the cost-benefit of AI makes sense, given the valuations of these companies.
Post-earnings, META is the only one whose share price is up (chart below).
▲ META: its increased AI spend (+33% YoY) was welcome since AI is boosting its ad business.
▼ AMZN: its increased AI spending (+50% YoY) hurt its cloud margins, leading to a selloff.
▼ MSFT: AI-related cloud demand was stronger than its capacity, leading to a miss on sales at its cloud business, alongside +80% YoY increases in AI investments.
▼ GOOG: beating on earnings wasn’t enough to offset concerns about its AI investments doubling year-on-year.
▼ NVDA: it beat expectations in pretty much every way, but the beats weren’t big enough (along with snags in production of its next-gen chip) to prevent a selloff.
So investors seem concerned about whether AI will create enough future profits to justify the AI spending spree (which is only expected to increase from here).
2. The consumer is still spending, but they’ve become cost conscious
Another key theme was the consumer. That’s because if we’re going to get a soft landing, we’ll need the consumer to keep spending. Some suggested concern about the consumer was overdone.
Strength from two big nationwide retailers – Walmart and Target – supported that sentiment, since both had better-than expected earnings results (Walmart even boosted their full-year profit and sales guidance!).
Overall, the consumer sectors did well (chart below), with positive earnings growth for both Consumer Discretionary (+13% YoY) and Consumer Staples (+3% YoY).
So it looks like consumers are still spending, but they’ve become increasingly cost conscious (which could pose a threat to margins).
3. S&P 500 earnings broadened beyond Mega Caps
Another theme this earnings season was earnings broadening beyond the Mag 7 (chart below), as we highlighted in our earnings preview.
For Q2, S&P 500 earnings grew +11% YoY (a 2½-year high), with nine out of 11 sectors seeing positive earnings growth (chart above).
Of course, the Mag 7 did see strong earnings growth (+35% YoY), but so did the rest of the S&P 500 (+6.5% YoY). That’s a change from Q1, where earnings fell 2% YoY for the rest of the S&P 500.
And analysts expect positive earnings growth from the rest of the S&P 500 in H2 2024. With market rates already falling in anticipation of the Fed’s rate hike cycle, that could help boost demand and relieve some rates-related margin pressure (and make all the AI investment a little cheaper to finance!). We’ll see in the coming months.
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