High Expectations Meet High Earnings
What happened last week?
The S&P 500, Dow and Nasdaq shed –0.95%, –2.27%, and –0.80%, respectively.
This week, investors will balance inflation data with the start of the first quarter earnings season.
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 4Q23. We believe many companies have embedded weakness in the final quarters of calendar years.
This keeps investors focused on future growth opportunities.
3 Things to Know
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 companies 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 healthcare analysts.
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.
Presidential years bring heightened uncertainty for big pharma and healthcare providers. In contrast, MedTech and biotech have historically outperformed in election years.
While political noise is surely going to grow in ’24, we expect 1Q 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.
See our weekly CIO Strategy Bulletin for more details