Earnings season is in full swing, and market participants are closely watching the results for insights into the health of the underlying markets and companies’ pricing power. According to Matt Stucky, a chief equity portfolio manager at Northwestern Mutual Wealth Management, the outlooks for 2024 will be a crucial factor driving stock actions, potentially overshadowing actual earnings results.
One interesting observation is that both companies and equity analysts tend to underpromise and overdeliver. Companies issue conservative guidance before surpassing expectations in the following quarter, while analysts set artificially low earnings estimates. David Kelly, the chief global strategist at JPMorgan Asset Management, expressed suspicion about this phenomenon, suggesting that analysts may deliberately low-ball the estimates.
Despite the prevalence of earnings beats, Wall Street analysts slashed earnings estimates heading into the fourth quarter of 2023. However, most market pundits do not consider these cuts a cause for concern. As of mid-January, roughly 85% of companies have surpassed the unambitious earnings estimates set by analysts for the fourth quarter. So far, earnings are exceeding estimates by 7%, indicating a potential mid- to high-single-digit gain for the quarter.
While early earnings results have been positive, there are still challenges ahead. Less than half of the companies are beating revenue expectations, which is a tougher hurdle to clear. Analysts and investors alike are curious to see if the breadth and magnitude of earnings beats will hold up as the fourth quarter progresses or if the larger sample size will bring results back to earth.
Overall, the fourth quarter earnings season has been relatively uneventful, with most companies meeting expectations and no major surprises. Carol Schleif, the chief investment officer at BMO Family Office, expected more attention and excitement around bank earnings, given their strong capital discipline and pruning of weaker business segments. However, other headlines have overshadowed their positive results.
Looking ahead, experts anticipate slightly positive earnings growth for the fourth quarter of 2023. Anthony Saglimbene, the chief market strategist at Ameriprise, expects 1% earnings growth, while David Bianco, the Americas investment chief at DWS Group, predicts a 7% rise. However, some concerns remain about the outlook for full-year 2024, with uncertainty surrounding stock valuations and potential market dynamics.
The S&P 500’s price-to-earnings (P/E) ratio is currently above historical averages, but opinions differ on whether this is a red flag for stocks. Some argue that if profit margins exceed expectations, the current valuations are justified. On the other hand, skeptics believe that the stretched valuations and optimism in the market are cause for caution.
While the tech sector has been a major driver of market performance, there are differing views on its future earnings growth. Investors are watching closely to see if companies can live up to investors’ high expectations, particularly in areas like artificial intelligence (AI). Technology, especially medical technology, is expected to continue performing well.
Outside of the tech sector, attention is also focused on the consumer discretionary sector to gauge the health of households. These results will provide insights into seemingly contradictory data points, such as robust consumer spending and rising credit card delinquency rates. While the US consumer remains strong, there are concerns about a slight softening in consumer behavior.
Given the lack of clarity about the strength of consumers and the economy, some experts suggest gravitating towards sectors that are less economically sensitive. Higher quality and more defensive equities could offer opportunities, especially with the potential for a period of market digestion or a continuation of the recent leadership rotation.
In conclusion, earnings season is unfolding with companies generally meeting or surpassing expectations. The focus now turns to the outlook for 2024 and the potential impact on stock actions. Stock valuations and the performance of the tech sector will be critical factors to watch, along with the health of consumers and the broader economy. As the earnings season progresses, market participants will gain a clearer picture of the overall market health and pricing power concerns.
