Citi: Tech, large caps expected to lead positive surprises for Q2 earnings

Citi analysts forecast a modest increase in positive earnings surprises for Q2, rising to 61% from 60% last quarter, marking the highest level since Q3 2022.

While the tech sector is expected to continue leading in positive surprises, the rate is projected to decline slightly to 83% from 88%. On the flip side, the energy sector is forecasted to lead in negative surprises, the bank’s note states.

“Positive surprises are expected to be more concentrated among large/mid-caps but have increased considerably for the smallest cap stocks, though still forecasted to post the most negative surprises,” analysts wrote.

Value-oriented sectors such as Energy, Utilities, and Materials are expected to report more negative surprises, aligning with Citi’s cautious outlook on value stocks.

Analysts also noted that the long-term analyst revision trend for the S&P 500 has reached its highest point this year, reflecting the market's response to the Federal Reserve’s indication of prolonged higher interest rates through the end of the year.

For the upcoming Q2 2024 earnings season, the consensus earnings growth for Russell 1000 companies is projected at 7.7% year-over-year, representing only a 0.7% decline since April. This reduction in consensus estimates is notably smaller than the 2-year and 5-year averages of -4.0% and -2.7%, respectively.

Citi analysts believe that seven out of eleven sectors will report positive year-over-year earnings growth, with Communication Services (20%), Health Care (17%), and Technology (15%) leading the gains. In contrast, Materials (-10%) and Real Estate (-7%) are projected to see the largest earnings declines.

“If we exclude Nvidia (NASDAQ:NVDA), Technology earnings growth would fall from 14.9% to 5.7%,” the note highlighted.