At time of writing, 379 out of the 500 companies which make up the S&P 500 Index have reported their quarterly earnings results. While we still have some way to go before this corporate earnings season is over, a clear pattern is emerging.
Of the companies which have reported so far for the period ended December 31st, well over half (55%) reported revenues ahead of expectations, while 78% came in with earnings (profits) which were above the consensus expectations for the period. Out of 11 major sectors in the economy which Bloomberg splits stocks into, 9 reported revenues ahead of expectations (energy and utilities missed), while 11 out of 11 sectors reported average earnings ahead of expectations.
If we look at the Nasdaq Index, it is a similar picture. Of the 100 stocks in the index, 65 have reported. Of those companies, 58% have reported revenues ahead of consensus expectations for the period, and 82% came in with profits above estimates. The average earnings growth for the stocks in this index was +27% YoY.
Last year was characterised by corporate earnings in the US beating expectations consistently through the year and subsequently the equity market delivered very strong price performance.
Earnings are as fundamental as it gets for stocks. If they do well, all else equal, equity prices should do well.
While one-third of companies still are yet to report, we have enough data now with two-thirds of listed companies having reported, to take the view that this looks likely to be yet another very strong earnings season for US stocks.
What is more remarkable is that last year’s strong earnings performance had led to a rise in forecasts. So, the bar for a ‘beat’ on expectations for this earnings season had been rising all through 2023. Yet results have still come in ahead of those raised expectations. This likely will precipitate increases in forecasts for corporate earnings through the rest of 2024.
One of the best indicators for short-term performance in equities is the direction of travel of earnings estimates. If earnings estimates start to come down, that is often a good predictor of short-term weakness in share prices (on average). And vice versa. When there is a period of earnings estimates rising across a sector, on an entire stock index, that is a good indicator of positive short-term price action.
Last year was a solid year for US stocks beating expectations in earnings, leading to rises in earnings forecasts. And US stocks did what last year? They went up… a lot!
Sometimes in investing the answer is easier than many would have you believe. Now appears to us to be one of those moments. Earnings are better than expected, forecasts are rising, and stocks have had a good January and February. If this corporate earnings performance continues, they are likely to have a good year.
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