Corporate earnings scored a second consecutive period in the black, up 4% in the fourth quarter of 2023, with projections for a solid 2024, according to FactSet Research. The two quarters of gains mark a turnaround after three straight quarters of losses. But that so-called “earnings recession” now seems like a distant bad memory.
The positive results come amid stubbornly persistent projections of an economic deceleration in 2024. Recall that 12 months ago, the economic consensus was for a 2023 recession, which never happened. The Conference Board, which was among those predicting a recession, now says that economic growth will slow to below 1% annually this year, after gross domestic product expanded 3.1% last year.
The expectations for continued earnings increases, however, buck those tepid economic forecasts, as seen by the FactSet survey of stock analysts, whose outlooks often are more sanguine than the economists polled for GDP outlooks. On average, the analysts see 4.2% earnings growth for the current quarter, and the next three to show even stronger profit increases: 9.6%, 8.1% and 17.4%.
John Butters, FactSet’s senior earnings analyst, wrote in a commentary that analysts’ typical revisions of earlier forecasts usually get reduced by around 3% of total S&P 500 earnings, as a new quarter is about to start. This March, though, the reductions are more muted at 2.2%. In other words, things look better and better up ahead.
The gloom and doom of a year ago stemmed from a scary event: the failure of several regional banks, notably Silicon Valley Bank, which prompted fears of a broader industry collapse. Due in part to that event, many analysts marked down their projections for 2023 earnings. Things did not turn out as badly as feared, and ardor for artificial intelligence-related stocks became a rocket for the market.
In particular, the pessimism surrounding a shrinkage of profit margins in 2023 turned out to be overly alarmist. As Jeffrey Buchbinder, chief equity strategist for LPL Financial, observed in a research note Wednesday, “the consensus net profit margin estimate last year was calling for 110 basis points of compression in 4Q2023. Instead, it looks like we’re going to get less than half that amount.”
Also, as 2023 rolled on, inflation abated and the Federal Reserve signaled it was ending its tightening campaign, with rate cuts ahead.
“Markets at the headline level, largely due to the dominant growth names with strong earnings power, are trading at richer valuations” than others, noted Keith Lerner, chief market strategist at Truist Financial Corp., a bank holding company.
The “dominant growth names,” of course, are huge tech companies. Nvidia Corp., for instance, posted a 496% year-over-year quarterly earnings spurt in th December-ending period.
The bullish sentiment is widespread. As Solita Marcelli, CIO for the Americas of UBS Global Wealth Management, put it, “While there could well be some slip-ups in the near term for U.S. equities if macro data disappoint, we still expect the direction of travel for the rest of the year to be higher against the generally positive economic backdrop and AI tailwinds.”
Tags: FactSet, Fourth Quarter, GDP, John Butters, LPL Financial, regional banks, S&P 500, Silicon Valley Bank, Truist, UBS