Earnings Update: Fourth Quarter Expectations

Earnings Update: Fourth Quarter Expectations

Overview

Fourth-quarter earnings season is kicking off with a mix of good and bad news. The bad news is that earnings estimates for the S & P 500 in the fourth quarter have dropped considerably. Health care and financial sectors have experienced substantial declines, while industrials are also affected. On the other hand, the lowered expectations provide an opportunity for corporations in these sectors to beat market expectations. Additionally, the largest tech stocks are expected to report strong earnings, contributing significantly to overall EPS growth in the fourth quarter.

Earnings Estimates

According to Savita Subramanian, head of U.S. equity and quant strategy at Bank of America, Nvidia, Amazon, Meta, Alphabet, Microsoft, and Apple will be the major contributors to EPS growth with a solid 56% year-over-year increase. It is important to note that without these six stocks, the rest of the S & P 500 is expected to experience a decline of 6% in earnings. Furthermore, positive news comes from the fact that 93.1% of the 29 companies in the S & P 500 that have reported earnings for the fourth quarter have exceeded analyst estimates, surpassing the long-term average of 66.6%.

Revenue Challenges

While many companies have reported strong earnings, several high-profile companies have already reported lower-than-expected revenues. This includes Nike, FedEx, General Mills, Wayfair, CarMax, PayChex, Conagra, Darden, and Constellation Brands. Consequently, analysts have started to revise down first-quarter estimates for these companies. Additionally, guidance from some companies has been disappointing, such as Delta, Microchip Technology, Mobileye, and Samsung Electronics. These revenue challenges indicate a potential weakening trend in EPS estimate revisions.

Outlook for 2024

For the S & P 500 to continue its growth in 2024, earnings need to expand. Despite an expected increase of only 2.9% in 2023, analysts anticipate an 11% gain in earnings for 2024, led by significant growth in the technology, health care, financials, and consumer discretionary sectors. However, with the current forward earnings multiple hovering around 19.6, caution is warranted as the market enters the very pricey range.

Risk Factors

The main risk to higher earnings is lower revenue growth. Without increasing revenues, companies will be compelled to reduce costs in order to maintain profitability. This can be further exacerbated by deteriorating pricing pressures and weaker demand. While it is possible for some companies to benefit from lower prices stimulating sales volumes, many will face challenges with reduced demand and lower sales prices. Nonetheless, there is still room for positive surprises, as the current consensus of a 4.4% earnings beat leaves potential for unexpected results.

Market Expectations

Deustche Bank’s chief U.S. equity and global strategist Binky Chadha predicts strong earnings beats of 8.7% in aggregate for the S & P 500, surpassing the 5.0% historical average. CFRA chief investment strategist Sam Stovall highlights that the S & P 500’s overall earnings have disappointed the Street only twice in the past 58 quarters, indicating ongoing market optimism.

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