Capital Ideas^TM

Quarterly earnings for most companies in the S&P 500 Index have exceeded expectations. Businesses continue to cut costs, pass on price increases to consumers and find new areas of growth.

As long-term investors, we look far beyond quarterly earnings, but we also pay close attention because they can reflect underlying trends. Furthermore, sharp declines in equity or debt post-earnings may offer attractive entry points.

Against that backdrop, here are three investment ideas we are tracking.

1. A new industrial revolution requires picks and shovels

Increased power demand from artificial intelligence combined with government incentives to rebuild infrastructure are paving the way for a new industrial revolution, says Anne-Marie Peterson, equity portfolio manager.

And with construction underway on only 16% of the roughly $1.2 trillion North American projects announced since 2021, outsized growth should continue in the ensuing years, according to executives at power management company Eaton during its earnings call. That figure only considers projects over $1 billion.

For its part, Eaton raised 2024 earnings expectations and specifically highlighted stronger than expected growth for data centers from so-called hyperscaler companies like Amazon and Google that provide cloud computing and data management services. Eaton’s electrical sector had a backlog of $11.3 billion in the first quarter of 2024, a figure that has grown steadily from the $2.8 billion it disclosed in the fourth quarter of 2019.

Eaton is just one example of a pick-and-shovel company that is well positioned to take advantage of the buildout of data centres, roads, water and energy systems, says Peterson. Others include machinery manufacturer Caterpillar, which reported during the quarter that its division that includes products for data centers outsold products for construction industries.

2. Streaming leader pulls ahead as industry reaches new phase

Netflix’s crackdown on password sharing delivered millions more subscribers and higher revenue. It also showed Netflix has a strong foothold against tech and media giants hoping to encroach on the company’s business, according to Thatcher Thompson, equity portfolio manager. 

Nevertheless, Netflix’s stock declined after it disclosed in an earnings report plans to stop reporting subscriber growth in 2025. “Investors are so focused on subscriber count that they don’t think of much else,” says Thompson. “But metrics such as pricing opportunities, international growth and a streamer’s advertising platform may be more important for the industry in future.”

The streaming war is far from over. Consolidation will continue as streamers seek to build scale. Longer term, we expect streaming leaders to become bigger players in video games and sports.

3. Olympic-sized opportunity: Young brands could upset legacy sportswear giants

The Olympics is the world’s stage for athletic dominance. It is also a high-pressure event for athletic brands to debut innovative products and grab market share.

“Smaller footwear brands such as Hoka and On have given legacy brands some competition lately. They’ve taken market share, and the upcoming summer Olympics serves as a backdrop for smaller brands to cement their status as credible opponents,” says equity analyst Beth Schulte.

The shift in sportswear is the result of factors ranging from pandemic-era supply chain issues that slowed the pace of innovation to upstart brands’ ability to harness the power of social media to go viral and scale quickly. There is also a natural fashion cycle as certain brands tend to move in and out of fashion, Schulte reports.

Recent first-quarter earnings reports show just how high the stakes are. Several larger companies have lowered guidance as they reset to find a base from which they can grow again. It will be important for legacy brands such as Nike and Adidas to re-establish their reputation as leading performance athletic brands.

Part of the reset includes increased investment in product innovation and marketing spend. “Nearly every major brand has put extra advertising dollars into the event, but it may be 12 to 18 months after the Olympics before investors know whether legacy brands will continue to lose ground,” Schulte says.

Meeting the challenges of high rates

The strong start to earnings season bodes well for many companies. Themes such as artificial intelligence and the resulting high capital expenditures spend from hyperscalers continue to resonate. There are signs that lower-to-middle income consumers are feeling stretched, which could impact certain companies as the year progresses.

“When it comes to investment decisions, I like to focus on specific companies rather than trying to read macroeconomic tea leaves. However, quarterly earnings do provide insights into how companies and consumers are handling high interest rates and other economic challenges,” Thompson concludes.