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Weekly Market Analysis - The Insider’s Guide to US Earnings Season
Posted on3 Things to Know
Earnings Matter
Corporate earnings periods are full of news about companies that exceeded, met, or disappointed relative to expectations. On a macro basis, we expect “good news” for earnings. Listening to CEOs, we hear that more large US firms are optimistic about their 2024 outlook. We find the confidence measure to be correlated with EPS surprises. This might not please investors in some highly valued and interest-rate sensitive shares. However, we see improving earnings “breadth” as a key market dynamic in 2024.
EPS Expectations
Earnings season is back in full swing, and we expect Q1 S&P 500 earnings per share (EPS) to beat current estimates by 6%. We had earlier revised our full year EPS estimates upward to 8% from 6% previously and we remain convinced that there will be improved earnings breadth this year.
Banks Take the Lead
Banks have outperformed the S&P 500 over a trailing 1-, 3-, 6-, and 12-month basis. On a top-down basis, an improving economic picture typically bodes well for this economically sensitive sector. Financials have historically been the best performing sector in the 12 months after ISM Manufacturing tops 50, which it did on April 1st. The highest quality banks are, for now, likely to maintain their steady cadence of dividend increases while boosting buybacks.
Summary
Earnings season is back in full swing. On a macro basis, we expect “good news” for earnings. Since 1997, the net positive results from first quarter earnings have been sequentially better than fourth quarter results 81% of the time. For this quarter, we expect S&P 500 EPS to beat current estimates by more than 6%. That is after a 4.2% beat in Q42023. We believe many companies have embedded weakness in the final quarters of calendar years. This keeps investors focused on future growth opportunities (see chart).
Listening to CEOs, we hear that more large US firms are optimistic about their 2024 outlook. The Business Roundtable CEO Confidence Index jumped 11 percentage points in 1Q24. Survey data for 1Q shows an improving breadth of industrial activity with US manufacturing in expansion for the first time since late 2022.
Portfolio considerations
Listen for a continuation of AI-related hype. With leading AI winners in the tech sector posting parabolic gains, investors have been looking for other ways to play the AI theme. Expect executives at leading energy, utilities, and electrical equipment companies to reference their own AI strategies. AI topics have evolved from chips to drive demand for computational power to power itself. The energy and electricity capacity needed to power data centers that enable AI computing will receive great attention.
Source: LSEG I/B/E/S, FactSet as of April 5, 2024. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees, or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.
Earnings Matter
When markets have rallied hard, as they have over the last six months (+25% since the October 2023 lows), it is natural to wonder if the good news is sustainable. While it is unlikely such heady gains are repeatable, we believe there is good earnings data ahead.
Listening to CEOs, we hear that more large US are optimistic about their 2024 outlook. The Business Roundtable CEO Confidence Index jumped 11 percentage points in 1Q24. Survey data for 1Q shows an improving breadth of industrial activity with US manufacturing in expansion for the first time since late 2022. We find the confidence measure to be correlated with EPS surprises. This might not please investors in some highly valued and interest-rate sensitive shares. However, we see improving earnings “breadth” as a key market dynamic in 2024.
EPS Expectations
Since 1997, the net positive results from first quarter earnings have been sequentially better than fourth quarter results 81% of the time. For this quarter, we expect S&P 500 EPS to beat current estimates by more than 6%. Among the 11 major market sectors, healthcare is likely to demonstrate the strongest improvement in EPS growth this year. Earnings revisions relative to poor 2023 results are optimistic.
But there are political headwinds. The annual final rate announcement for Medicare Advantage plans is usually a sleepy affair for all but the most in-the-weeds health care analysts. But this year’s release, on April 1st, came as a big disappointment to managed care stocks as final rates were not revised higher despite rising costs and heightening utilization of medical insurance. Few investors expected this outcome, but it is a sign of the politics surrounding the 2024 elections.
As we recently highlighted in our latest equity piece on Healthcare, presidential years bring heightened uncertainty for big pharma and health care providers. In contrast, MedTech and biotech have historically outperformed in election years. While political noise is surely going to grow in ’24, we expect Q1 reporting season will refocus investors on fundamentals, where a broad recovery is healthcare is likely to be supported by earnings.
We remain in favor of MedTech stocks which should benefit from receding concerns associated with anti-obesity drugs (GLP-1s), greater medical procedure volumes as well as an upcycle in new product pipelines.
Banks Take the Lead
Big banks in the US kick-off earnings season this coming week (April 12th). Banks have outperformed the S&P 500 over a trailing 1-, 3-, 6-, and 12-month basis. Investors will be looking for evidence of a fundamental improvement in bank profitability. Initial indications point to a more upbeat tone from the big banks (we, of course, make no comment on our own firm).
In February, senior loan officers at large banks signaled some accommodation in lending standards for corporate loans after several quarters of net tightening. Loans to consumers and commercial real estate, however, remain constrained. Regional banks, many of whom are managing more challenging loan books, have also kept tight reigns on additional lending. While bank analysts look at interest rates and the yield curve to assess net interest margins, a pickup in aggregate lending is foundational if the recent bank rally is to be sustained.
On a top-down basis, an improving economic picture typically bodes well for this economically sensitive sector. Financials have historically been the best performing sector in the 12 months after ISM Manufacturing tops 50, which it did last week. Even though more onerous capital requirements are likely after the elections, the highest quality banks are likely to sustain their cadence of dividend increases while boosting share buybacks.
