Barclays' Venu Krishna on Sector Bifurcation in Earnings and Market Outlook

Earnings Season Overview

• 💡 With two-thirds of the S&P 500 having reported, earnings per share (EPS) surprise has been strong, indicating better than average EPS growth.
• 📈 Aggregate sales growth is over 5%, and earnings growth is around 8.5%, suggesting positive operating leverage in the market.

Sector Bifurcation in Earnings

• 🎯 A clear bifurcation is driving the market, with big tech significantly outperforming.
• 🚀 Big tech companies have reported earnings growth of 27%, with a net margin improvement of nearly 200 basis points and an upside surprise exceeding 12 percentage points.
• ⚠️ Outside of big tech, particularly in the rest of the S&P 500, there are signs of building margin pressures.

Sector Recommendations and Risks

• 🏦 Barclays favors big tech and financials, a stance they've held for over two years.
• 📉 Most sectors outside of financials and big tech are performing worse than their long-term averages, indicating a need to be selective.
• 📈 Companies that can pass through price increases are better cushioned against pressures like tariffs, especially in consumer-exposed spaces where demand might be inelastic.

Market Outlook and Strategy

• 📊 The base case for the S&P 500 price target is 6050, with an upside case of 6600, suggesting the current range of 6050 to 6600 is reasonable.
• 🗓️ Looking past 2024, which has been dominated by policy and tariff uncertainty, the outlook for 2025 is optimistic.
• 🌱 In 2025, with moderating economic growth, improved consumption, and sticky inflation, earnings growth is projected to accelerate to nearly 9%, supporting an optimistic view.
• ⏳ While short-term choppiness is possible due to macro data reactions, the trend suggests that looking beyond 3 to 6 months reveals a more positive market environment.