Earnings Season Supports Market Valuations The third-quarter 2024 earnings season is largely competed, although a handful of stocks are still to report. That includes the heaviest of heavy hitters, Nvidia, whose impact on overall earnings is meaningful given the scale of its operations. A handful of other large IT names are forecast to deliver strong growth to end the EPS season, although retail earnings remain a wild card. While the numbers are not final, the general trend is set. Earnings for 3Q24 exceeded expectations, as they almost always do, with the number of earnings surprises and the magnitude of earnings upside coming in slightly above average. We have revisited our full-year expectations for 2025 and formalized our 2026 forecast for S&P 500 earnings from continuing expectations. Growth in EPS is an important component of our valuation matrix and, along with declining inflation and interest rates, helps support our favorable view of equities even at these elevated levels. Third-Quarter 2024 Earnings As of 11/8/24, approximately 91% of S&P 500 component companies had reported earnings from continuing operations for the third quarter of 2024. Collectively, earnings for these component companies increased in single-digit percentages from the third quarter of 2023. We analyze the computation of quarterly earnings from multiple sources. Differences in the reported growth rates reflect variation in prior-year baseline, definitions of continuing-operations earnings, and other factors. As of November 8, FactSet showed a blended earnings growth rate of 5.3% for 3Q24; blended growth rates incorporate both reported earnings and the consensus estimates for companies that have yet to report. Refinitiv showed a blended growth rate of 8.6% year over year for S&P 500 3Q24 continuing operations earnings. And Bloomberg showed a blended growth rate of 8.9%. In the following discussion, we will mainly draw on Bloomberg data and detail unless noted otherwise. In addition to share-weighted change, Bloomberg also showed a market-cap-weighted change of 12.1%. This suggests that the mega-cap companies, such as Information Technology giants Microsoft and Apple, are growing earnings faster than the mid- to large-cap companies in the index. To that point, S&P 500 earnings excluding IT would have grown at a more-muted 6.4% rate. At the other end of the spectrum, S&P 500 earnings excluding Energy would have grown 10.8%. As we discuss below, negative earnings growth from three sectors pulled down the overall EPS growth rate for 3Q24. The likelihood that many companies in these three sectors will swing to positive comparisons in 2025 contributes to our growing optimism about next year's earnings. Approximately 75% of companies reported 3Q earnings above consensus estimates, according to FactSet; Refinitiv has that percentage at 76%. Both are about in line with the 10-year average of 75%, though below the five-year average of 77%. The two agencies also disagree on the magnitude of the beat against expectations. FactSet states that 3Q24 earnings have topped expectations by 4.3%, while Refinitiv calculates the magnitude of the collective beat at 7.8%. Bloomberg calculates a number between 5% and 6%. All of the reporting agencies are in agreement on sector performance and, in particular, on the three sectors that are dragging down overall performance. The sectors showing the highest EPS growth rates for 3Q24 are varied across growth, income, defensive, and cyclical. At the top are two growth sectors, Communication Services (up 26%) and Information Technology (up 17%). They are followed by defensive income-oriented sectors Utilities (up 16%) and Healthcare (up 15%). Consumer Discretionary (up 11%) and Financial (up 9%) round out the top six. Consumer Staples and Real Estate are both reporting single-digit EPS growth for the quarter; Real Estate earnings have been mainly negative since the pandemic disrupted traditional work spaces. The bottom three sectors are negative for 3Q24 earnings: Industrials (down 6%), Materials (down 7%), and Energy (down 26%). Approximately 72% of companies reported annual earnings growth for 3Q24, and 27% reported annual earnings declines. The negative companies and sectors are 'punching above their weight' when it comes to pulling down total S&P 500 EPS growth for the quarter. For the nearly three-quarters of companies that reported positive earnings, EPS growth averaged 21%. For the one-quarter of companies posting negative annual comparisons, the average EPS decline was also 21%. Earnings Analysis for 2025 and 2026 Heading into 3Q24 earnings season, our forecasts for S&P 500 earnings from continuing operations were $247 for 2024 and $265 for 2025. Our 2024 forecast has not changed, given that 3Q24 season played out in line with our expectations and that 4Q is also shaping up to meet our estimates. We are, however, more favorably disposed to 2025 earnings. And we have also formalized and raised our preliminary forecast for 2026. Our increased optimism toward 2025 and 2026 reflects expected better performance for some of the deeply-lagging sectors, partly offset by EPS growth moderation in some of the fastest-growing sectors. According to forward consensus estimates, the Energy sector's annual earnings decline will moderate in 4Q24 and 1Q25 before swinging to a modest positive in the second or third quarter. Materials and Industrials could swing to positive comparisons more quickly, possibly as soon as 4Q24 (Materials) and 1Q25 (Industrials). The strongest EPS growth in 3Q24 came from Communication Services, and specifically the media giants Meta Platforms and Alphabet. Growth forecasts for the sector in 2025 and 2026 anticipate potential moderation from high-teens percentage growth in 2024 to low-double-digit or even high-single-digit percentage growth going forward. Other sectors, however, are forecast to hold their current strong growth rates for the next year or more. Information Technology is forecast to sustain double-digit EPS growth in the mid- to high-teen percentages through 2026. Utilities growth is forecast to moderate, but only slightly, while remaining above long-term average. Other sectors forecast to grow EPS above their long-term averages include Financial, Healthcare, Consumer Discretionary, and Consumer Staples. The three sectors that were negative in 3Q24 are also forecast to bounce back to growth that beats their long-term averages. We believe growth momentum for the commodity-sensitive Energy and Materials sectors will depend on the success of the Chinese government's stimulus program and other factors, including potential new tariffs. Upward Revisions in 2025 and 2026 Earnings Forecasts For 2025, we are raising our forecast for S&P 500 earnings from continuing operations to $276, from $265. Whereas our prior forecast assumed high-single-digit growth, our revised forecast models full-year EPS growth of 11.8%. The key drivers of our more-positive outlook include all three of the negative sectors for 3Q24 swinging to full-year growth in 2025. That includes mid-single-digit growth in Energy earnings, and low-double-digit growth in Materials and Industrials. We also look for continued double-digit growth in key large sectors including Communication Services, Information Technology, Healthcare, and Consumer Discretionary. We look for a return to more-normal mid-single-digit growth in Utilities and to low-single-digit growth in Consumer Staples. For 2026, we are raising our forecast for S&P 500 earnings from continuing operations to $307, from a preliminary outlook around $285. Whereas our prior forecast assumed high-single-digit growth, our revised forecast models full-year EPS growth of 11.2%. For 2006, we are keeping in place several of the above-average growth assumptions in our 2025 forecast, while moderating the overall growth outlook slightly. We expect the AI transformation to continue driving growth in Communication Services, Information Technology, and Consumer Discretionary. We look for growth to slow in defensive sectors, but to pick up in Energy. Conclusion Bond yields hit multi-month lows following the Fed's mid-September rate cut, but have since surged higher. The 10-year Treasury yield, which went from 4.71% in April 2024 to 3.62% in mid-September, has now worked back to the 4.43% range -- last seen in June and July. The quarter-point cut at the FOMC's November meeting has not stopped the upward trend in long yields. In our modified earnings-yield model, rising interest rates are negative to valuation assumptions. We still expect interest rates to work lower as the Fed continues its rate-cutting regime. Along with lower inflation and higher earnings, lower rates support our positive view of equity valuations -- even with the stock market near all-time highs.

Charles River Laboratories is a non-clinical contract research organization (CRO), providing drug discovery, non-clinical development, and safety testing services in the United States, Europe, Canada, and the Asia Pacific region. It operates through three segments: Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Solutions (Manufacturing). The company is headquartered in Wilmington, Massachusetts.

Charles River Laboratories was founded in 1947 and is a leading provider of drug discovery and development services. The company’s research model & services segment is the leading provider of animal models for laboratory testing, which breeds and delivers animal research models with specific genetic characteristics for preclinical studies around the world. The discovery & safety assessment segment includes services required to take a drug through the early development process, including discovery services. The manufacturing support segment includes microbial solutions, which provides in vitro (non-animal) testing products, biologics testing services, and avian vaccine services.

Charles River Laboratories is a non-clinical contract research organization (CRO), providing drug discovery, non-clinical development, and safety testing services in the United States, Europe, Canada, and the Asia Pacific region. It operates through three segments: Research Models and Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Solutions (Manufacturing). The company is headquartered in Wilmington, Massachusetts.