Let’s review our Triple Threat themes for 2024:
- Commencement of Fed cutting cycle
- Room for broad P/E multiple expansion
- And today’s theme #3: all-important corporate earnings growth
The direction of earnings is the key driver to stock prices over the long term. Here comes the bad news/good news: The bad news is earnings growth is off to a slow start as financials/banks “take out the trash” with regards to cleaning up 2023 problems. The good news is earnings should accelerate throughout 2024 and these are very early days. Patience is prescribed.
With roughly 20% of companies in the S&P 500 index having reported results, Q4 earnings season is off to a relatively weak start. Before reporting began, earnings were expected to have grown by 1.6% compared to the same quarter the prior year. However, companies that have reported so far have seen their earnings decline by 4.7%. Blending these actual results with what is currently expected for the remaining 80% of S&P 500 companies that are yet to report, we find that the overall index is now on track to see its earnings decline by 1.7% in Q4.
The main culprit behind such weaker-than-expected showing is the financial sector. This is due to a $16.3 billion FDIC special assessment, which was needed to replenish funds that were spent to backstop deposits at Silicon Valley Bank and Signature Bank earlier in the year. The assessment was charged proportionally to the size of the institution; as the largest US bank, JPMorgan Chase alone was responsible for paying $2.9 billion, which reduced its pre-assessment earnings of $12.2 billion by 24%. As a whole, earnings for the financial sector are now expected to come in 19.4% lower than the same quarter a year ago, down from an expected decline of only 2.2% before reporting began. Importantly, however, this is a one-time charge that does not affect the outlook for the sector going forward, with analysts still expecting the sector to deliver earnings growth of 12% in 2024.
Meanwhile, the communication services sector is expected to be the bright spot of this earnings season, with earnings projected to come in 41% higher than the same quarter the prior year. The sector is dominated by internet and media giants such as Meta, Alphabet, and Netflix. After a weak 2022 in which the sector was punished for overextending itself during the COVID-19 era, a renewed focus on efficiency and profitability has been paying dividends in 2023. Earlier this week, Netflix reported a whopping 1,658% earnings growth compared to the same quarter the prior year. Meta and Alphabet are due to report next week and are expected to deliver similarly strong results.
After what is now expected to be a pullback in Q4 2023, S&P 500 earnings should resume their recovery and see a healthy pace of growth going forward. The current estimates point to a 12.2% increase for 2024 and a 12.8% increase for 2025. While we are yet to find out more details about how corporate America fared last quarter, that is already history. What the market cares about the most is what happens next, and the future looks bright.
Source: FactSet, as of 1/19/2024
Source: FactSet, as of 1/19/2024
Source: FactSet, as of 1/19/2024
Sauro Locatelli CFA, FRM™, SCR™
Director of Quantitative Research
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