Companies aren’t getting much credit for beating lowered estimates this earnings season, like the guy at the YMCA who can only manage a slam dunk on a lowered rim. That didn’t stop the stock market’s march to new highs.
The
S&P 500 index
rose 1.17% in a holiday-shortened week to close at a new record for the first time since January 2022. The
Dow Jones Industrial Average
added 0.72%, also reaching a new high, and the
Nasdaq Composite
popped 2.26%.
U.S. bank stocks generally slid after reporting fourth-quarter 2023 earnings, weighed down by billions of dollars of special charges to pay back regulators for backstopping failed regional banks’ deposits last year. They were offset by semiconductor stocks, which had a particularly strong week after the world’s largest chip maker,
Taiwan Semiconductor Manufacturing,
gave a bullish forecast for the year ahead.
For the most part, though, investors have proved hard to impress. Of the 43 S&P 500 companies that had reported by Thursday morning, 88% beat the consensus earnings-per-share estimate—but 60% of that group fell the following day, and 72% of them trail the index since reporting, according to Wells Fargo Securities equity strategy head Christopher Harvey.
“As we expected, earnings season has been a sell-the-news net negative catalyst—likely because of initially conservative 2024 outlooks,” Harvey wrote on Friday.
Still, the bulls are counting on a lift from earnings this year—no matter the initial reaction to the numbers. Wall Street’s consensus calls for 11% S&P 500 EPS growth in 2024—which would help justify an index trading at about 20 times forward earnings.
Management teams have generally been more tentative. “We remain in a challenging environment, but we continue to see some signs of improvement…with uncertainty around the timing of any potential inflection,” said
J.B. Hunt Transport Services
President Shelley Simpson on her company’s earnings call on Thursday.
Goldman Sachs
Group CEO David Solomon expressed a similar sentiment on Tuesday, when he said that “we’re going to continue to take a cautious view in terms of the overall operation of the firm.”
Nike
CEO John Donahoe warned about a “highly promotional environment,” “increasing macro volatility,” and “more-cautious consumer behavior around the world” on his company’s fiscal second-quarter earnings call late last month.
The risk is that too much negativity from management teams this earnings season sends that exuberant 2024 earnings estimate downward, much like the fourth-quarter 2023 forecast has gone, making the market appear even pricier. Back on Oct. 1, analyst consensus penciled in 11% year-over-year EPS growth for the fourth quarter, according to IBES data. Now that’s down to 4.5%.
A repeat of that pattern for the year ahead would be problematic. Companies just don’t get much credit for beating a low bar based on transparently conservative assumptions. Contrast this earnings season’s vibe to the third-quarter reporting season—a three-month period in which the U.S. economy expanded at a 4.9% annualized rate and brought an end to a streak of negative earnings comparisons and headlines.
“Earnings are, well, fine,” just doesn’t have the same ring to it as “the earnings recession is over” did three months ago.
Of course, earnings season continues apace, and it remains to be seen what the prevailing tone will be. More than 70 S&P 500 companies, including
Tesla,
AT&T,
Johnson & Johnson,
Visa,
General Electric,
and
Intel,
are scheduled to report this coming week. The following week will be even more packed: About a quarter of the index’s components will publish results, including
Microsoft,
Apple,
Exxon Mobil,
Boeing,
and
Qualcomm.
Earnings season is just getting started. How it finishes could go a long way toward determining the tone for the rest of 2024—and whether the market can continue rising from here.
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com
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