Despite uncertainty about when the Fed will cut rates and Wall Street's concerns that the Fed is keeping interest rates at 23-year highs and weighing on stock prices, earnings averaged It exceeded Wall Street's expectations.
Through about two-thirds of the S&P 500's fourth-quarter 2023 report, companies beat the current quarter's average earnings per share by 6 percentage points, according to Bank of America. This is about twice the average of 3 percentage points typically seen by S&P 500 companies.
Overall, 70% of companies beat Wall Street expectations, which is higher than the historical average of 63%. According to FactSet, the S&P 500 (^GSPC) is on pace to increase earnings per share by 1.9% compared to the same period last year.
Oson Kwon, U.S. and Canadian equity strategist at Bank of America, told Yahoo Finance that returns to date have been “good” based on expectations.
“Beat is driven by profit, not necessarily sales,” Kwon said. “I don't think anyone really expected sales to improve this much in the fourth quarter…Companies are cutting costs, margins are improving, and companies are delivering.”
This kept the constructive story intact for the stock. The S&P 500 index is up about 3.4% since JPMorgan (JPM) and other large banks officially began reporting their fourth quarter on January 12th. As Deutsche Bank chief equity strategist Binky Chadha wrote in a research note on Monday, this is on track for the average 2% increase seen in the benchmark through his first four weeks of earnings reporting. exceeds.
However, earnings are not without problems. BofA said references to weak demand remained “up” and revenue narrowly beat expectations.
In the long term, BofA believes that the current lackluster demand situation will improve. Kwon points out that South Korea's exports, including key products such as chips, are recovering. South Korea is a leading indicator of the global manufacturing cycle per Kwon, and the United States in particular imports more products from South Korea than any other country. A similar trend is playing out in the continental United States, with the recent recovery in the U.S. ISM manufacturing index a potential indicator of future increases in business activity.
“Once demand actually starts to improve, that's when you'll really start to see further improvement in margins because companies will realize that operating leverage will continue to improve.” he said.
Key bear case: A significant increase in layoffs. But for now, layoffs are not widespread enough to dominate closely watched economic indicators, such as weekly jobless claims.
Bank of America believes the peak of the layoff cycle has already arrived, as evidenced by significantly more mentions of layoffs in the first quarter of 2023 than in the current reporting period. BofA's team believes that revenue will continue to grow, and its research shows that this is typically not the time for a significant increase in layoffs.
“Historically, layoffs and the earnings cycle have shown a strong inverse relationship,” Kwon and colleague Savita Subramanian wrote in an earnings research note on Monday. “The virtuous cycle in earnings expected in 2024 suggests that the peak of corporate layoff cycles is likely behind us.'' The job market remains strong. ”
There were widespread signs of increased scrutiny from investors this earnings season. According to BofA, companies that fail to meet Wall Street's earnings and sales expectations experience a 4.3% decline in stock prices on average the next day. This is significantly higher than the typical average decline of 2.4%.
“Overall market sentiment has improved significantly over the past two months,” Kwon said. “Valuations aren’t cheap, so if you’re lacking; [earnings estimates]If you do so, you will be subject to more penalties than before, so the bar will be much higher. ”
The bearish signs extend beyond the S&P 500. More than 70% of S&P 500 companies exceed earnings expectations, while only 62% of Russell 2000 (^RUT) companies generate similar returns, according to RBC Capital Markets analysis. . This is reflected in the market performance, with the Russell 2000 index, which many on Wall Street expect to rise significantly this year, down less than 1%. For the past month. Meanwhile, the S&P 500 index rose more than 5%.
“Average price earnings results have not been as good as economic indicators, especially in lower-quality areas,” Mike Wilson, Morgan Stanley's chief investment officer, said in a note to clients Sunday night.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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