The 2nd quarter and first half of 2024 are rapidly coming to a close, setting the market up for its summer adventure. The latest read on earnings expectations is positive and suggests the market will continue to rise. Not only are S&P 500 (NYSEARCA: SPY) earnings expected to accelerate from the prior quarter, but the consensus estimate for Q2 reported by Factset is holding up under revisions, and the forecasts for the year and next year are rising.
In this scenario, the S&P 500 could continue to rise through the end of next year, assuming no change in the trend. This is a look at the three sectors with the hottest growth outlook going into the Q2 earnings reporting season and the stocks set up to drive them higher by year-end.
Communications Services is the Hot-Ticket Item This Quarter
Communications Services (NYSEARCA: XLC) will be the hot-ticket item this quarter and the remainder of the year. The sector is expected to grow by 18.25% in Q2 and 21% for the year, with both estimates rising. Because the bar is set low for many companies within the index, estimates may continue rising this year. However, the bulk of the gains will be posted by only two companies, so targeting them may be better than an index-tracking ETF. Those two companies are Meta Platforms (NASDAQ: META) and Google parent Alphabet (NASDAQ: GOOGL), which account for nearly 50% of the portfolio and are forecast to grow their earnings by 60% and 27%.
Among the differences in their outlooks is that Meta Platforms will see more significant top-line growth and substantially wider margins. Another difference is that Meta Platform’s analysts have been lowering the bar while Alphabet’s has raised its. Both could produce outperformance in this scenario, but it would be more significant for Google. Analysts rate both stocks at Moderate Buy, and price target revisions have led them higher this year. However, Meta Platform's price targets were trimmed over the last quarter and may not rise again without a solid report. Meanwhile, legacy communications companies like Verizon (NYSE: VZ) are expected to post a small single-digit top-line advance and margin contraction.
Technology Sector: AI Is Driving Big Gains for Some Companies
The Technology Sector (NYSEARCA: XLK) is expected to post the 3rd largest earnings gain for the quarter, about 17%, and the 2nd largest for the year, 18.8%, suggesting steady high-teens growth for the remainder of the year. This estimate is rising on revisions for most top-ten holdings, a who’s-who list of today’s leading AI players. The sector is heavily concentrated in Microsoft (NASDAQ: MSFT) and Apple (NASDAQ: AAPL), which account for nearly 45% of the index, but all of the top 10 contribute to the outlook.
The #1 pick for earnings growth in this sector is NVIDIA (NASDAQ: NVDA). Analysts are forecasting another 110% top-line growth on top of the 100% growth posted last quarter and margins to widen. Earnings are expected to grow by 130% and substantially improve the balance sheet and cash position. Advanced Micro Devices (NASDAQ: AMD) will also have a good quarter if overshadowed by legacy businesses. Analysts forecast sequential and YoY acceleration to 6.7% top-line growth and wider margins, and the bar may be low due to recent revisions.
Healthcare Has a Healthy Outlook for Growth
The Healthcare Sector (NYSEARCA: XLV) has only a middling outlook for the year but is expected to post the 2nd strongest earnings growth this quarter and for annual earnings growth to double this year to next. The leading stocks in this group are Eli Lilly (NYSE: LLY), UnitedHealth (NYSE: UNH), and Johnson & Johnson (NYSE: JNJ), accounting for roughly 35% of the holdings. The leading driver of the growth is Eli Lilly due to its position in the GLP-1 market. It is expected to post 20% top-line and 30% bottom-line growth this year, with revenue to advance 30% next year and earnings 50%. UNH and JNJ are expected to post growth in the single-digit range this year and accelerated low-double-digit growth next.
