An underwhelming earnings season has been playing out, but the good news is that lackluster numbers don’t indicate faltering consumer demand or threaten a stock rally. Plus, big tech may still come to the rescue.
As of Friday, a quarter of
S&P 500
companies have reported fourth-quarter results, and tech heavyweights such as
Amazon.com,
Apple,
and
Microsoft
don’t report until this week. Roughly 70% of the reported earnings per share topped expectations, with slightly fewer beating on the top line. However that’s tracking slightly below historical trends, and upside surprises have only yielded muted reactions to their beats.
All together “we’d describe fourth-quarter-reporting season as a mixed bag so far,” writes RBC Capital Markets Head of U.S. Equity Strategy Lori Calvasina.
Financials usually lead earnings season, which is why we’ve seen reports from that sector’s biggest players, such as
JPMorgan Chase
and
Goldman Sachs Group,
but none of the megacap tech stocks in the so-called Magnificent Seven. So far, one recurring theme from these results is big banks’ clients are generally “re-risking—i.e., moving funds out of money markets into other assets,” notes Wells Fargo’s Head of Equity Strategy Christopher Harvey.
With high interest rates pushing up yields on savings and money-market accounts, many investors have been tempted to park their cash risk-free, even if these returns can’t compete with stocks long-term. However, recent fund-flow data echo financials’ commentary, as enthusiasm about the stock and bond markets have pushed more money back into these investments.
Likewise, financials have also pointed to ongoing strength from consumers, even as inflation remains well above prepandemic levels. Most recently,
American Express
shares shot to record territory on Friday, as the card firm’s report and guidance demonstrated how its well-heeled customers are continuing to spend.
Harvey notes that this trend was also obvious in reports from
Visa
and JPMorgan, and while many Americans are still laser-focused on value amid the higher cost of living, “‘high-end’ buyers are faring better than the low end (e.g., airlines,
Nike,
Constellation Brands
).” That’s good news given how dependent the economy is on consumer spending.
Given that financials often eschew full-year guidance, and many other companies are just introducing their 2024 forecasts, there haven’t been many corporate updates for the full year.
Still, full-year earnings-per-share estimates for the S&P 500 as a whole have slipped since the start of the year, to $242.50 from $245. RBC’s Calvasina opines that this figure has been dragged down by several metrics, including margin forecasts, somewhat offset by revenue growth.
“It’s still quite early in fourth-quarter-reporting season,” she writes. “But for the moment we feel like the broader U.S. equity market is behaving a little better than we’d expect based on the results that have come in.”
That may sound worrisome: After all, the S&P 500 is up 2.5% through the end of last week, in contrast to the 1% decline in expected 2024 earnings per share.
In fact, things look even hairier over the past 13 months, considering the S&P 500 is up 27% even as that period saw 2024 earnings per share estimates decline 3%.
However DataTrek Research co-founder Nicholas Colas argues investors shouldn’t be too concerned.
Even if S&P 500 earnings fall another 3% by the end of the year, to roughly $236, that would still be a new record high for the index, he highlights, as well as an impressive 45% higher from $163 in 2019 (the last prepandemic year). Moreover, the S&P 500 is up about 50% from that year’s close—more closely tracking earnings growth.
Ergo, longer-term stocks’ gains have been supported by greater profitability, and near-term rejiggering of expectations won’t dent that pattern.
Furthermore, there’s still time for big tech to save the day, as it’s done in the past.
Recent analysis from
FactSet
showed that the aggregate expected fourth-quarter earnings growth for Amazon, Apple,
Alphabet,
Meta,
Microsoft, and
Nvidia
(basically the Magnificent Seven minus Telsa, which saw fourth-quarter earnings tumble) is expected to grow by 54%; that’s in stark contrast to a 10.5% decline for the other 494 S&P 500 components. In other words, without these half dozen giants, the index’s earnings would be down 11% year over year in the fourth quarter.
“It is fair to say that near-term S&P 500 earnings growth is entirely due to the Big 6 and nothing else,” concludes Colas. When the economy is growing slowly and steadily, outsize earnings growth is hard to find…That’s why Tech, with its secular tailwinds, tends to outperform. Such is clearly the case now, and we continue to prefer it to all other sectors.”
Investors agree: After outperforming through 2023, the
Nasdaq Composite
is once again leading the way, up 3% this year.
Write to Teresa Rivas at teresa.rivas@barrons.com
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