‘A negative catalyst:’ What Wall Street is expecting this earnings season
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The fourth-quarter earnings season kicks off later this week, as investors look for clues on what corporations are expecting for the new year and indications of how they finished 2023. Earnings in the S & P 500 are expected to have risen 1.3% in the fourth quarter, which would be the second straight quarter of year-over-year earnings growth for the index, according to FactSet. Citigroup , Bank of America , JPMorgan Chase and Wells Fargo — as well as Dow Jones Industrial Average component UnitedHealth — are all slated to post their results Friday. Full-year 2023 earnings for the S & P 500 are expected to remain flat year over year, but analysts have a much rosier outlook for the new year. Earnings per share for 2024 are expected to surge more than 11% according to Evercore ISI, a rise some market observers say is too lofty given forecasts of softer economic growth this year. “The problem with the setup coming into this earning season is that, basically, there was a widespread belief in terms of both sentiment and positioning on the part of investors that the earnings growth expectations embedded in consensus right now are achievable,” wrote Evercore ISI senior managing director Julian Emanuel in a recent note. “And those kinds of numbers are not achievable even in a no landing scenario,” Emanuel said, referring to the possibility that inflation is tamed by the Federal Reserve without the economy slowing down. Emanuel, who expects a somewhat harder landing for the economy than investors are anticipating, said investors should prepare for downward earnings revisions over the course of the earnings season. He projects 2024 earnings of $221 per share for the S & P 500, far lower than the consensus expectation of $240 to $260 per share currently anticipated on Wall Street. “The market is not priced to ignore downward earnings revisions,” Emanuel said. “And so in general when we look at the landscape, we think there’s a vulnerability in equity prices over the earning season.” Stocks have struggled to start the year ahead of the season. The S & P 500, Dow Jones Industrial Average and Nasdaq Composite are down in early 2024, coming off a huge surge at the end of 2023. .SPX YTD mountain S & P 500 in 2024 Disappointing early announcers Already, there are some troubling signs from S & P 500 early announcers. Wells Fargo’s head of equity strategy Christopher Harvey on Friday noted early reporters up to that point had underwhelmed investors. In fact, 12 out of those S & P 500 companies saw a subsequent one-day drop in their stock prices, with all 20 names averaging a 1.3% underperformance. Walgreens, for example, dropped 5.1% Thursday after the drugstore company roughly halved its dividend and cited consumer pressures ahead. “We believe the introduction of underwhelming full-year 2024 guidance likely will remain a near-term net negative catalyst, a view supported by January/ February’s historically lackluster equity returns,” Harvey wrote. Others are more positive on the earnings outlook for this year. CFRA’s Sam Stovall expects 2024 earnings expectations to be fair, citing inflation pressures and supply chain conditions that are easing, which could boost profit margins, as well as a softer dollar that could bolster companies with overseas operations. The core personal consumption expenditures price index — the Federal Reserve’s favorite inflation gauge — rose 3.2% year over year in November , moving closer to the central bank’s target. The consumer price index, a more followed metric on the Street, rose 3.1% in November from a year prior . The dollar index, which tracks the greenback’s performance against a basket of rival currencies, is down more than 3% over the past three months. .DXY 3M mountain Dollar index 3-month chart Stovall said those skeptical of strong earnings this year will have to be correct on two fronts for earnings estimates to start coming down. “Consensus has to be wrong twice, on earnings estimates, as well as the direction of the market, for somebody who is expecting earnings to come in weaker than consensus estimates, in order for them to be correct,” Stovall said. Sector breakdown Companies in the utilities and communication services sectors are among the early reporters with the largest percentage of negative guidance for the fourth quarter, FactSet data showed Friday. Consumer staples companies had the most bullish outlook on corporate reporting, with roughly 50% issuing positive guidance. Only five out of 11 sectors are expected to report year-over-year earnings growth for the quarter, with communication services, utilities and consumer discretionary set to outperform, according to FactSet. Analysts expect 41.6% growth from communication services, 33.7% from utilities and 23% from consumer discretionary. On the other hand, energy, health care and materials are expected to be earnings laggards. Health-care stocks are set to post the second-largest earnings drop in the S & P 500, down 20.3%, FactSet said. Pfizer, Merck and Moderna were the names contributing most to the decrease. Still, the sector has been outperforming this year, up more than 3% as investors expect the sector may have bottomed. Energy earnings are expected to have fallen nearly 29%, while materials are forecast to have dropped 20.3%.
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