Earnings reports are in
As we embark on the first quarter 2024 earnings season, investors are watching closely as U.S. companies navigate the current economic landscape. While earnings growth is expected to moderate compared to the previous quarter, the outlook for the remainder of the year suggests a rebound.
According to Refinitiv IBES data, the S&P 500 is forecast to generate nominal earnings growth of 2.7% year-over-year in Q1 2024 (Chart 1), however, adjusting for inflation, real earnings are forecast to contract by 0.8% in Q1 (Chart 2).
Graph 1: Nominal earnings expectations
Graph 2: Actual profit expectations
Companies and sectors
At the sector level, seven of the eleven sectors are expected to record positive earnings growth (Figure 3), led by communications (26.7%), technology (20.9%), services (18.4%) and discretionary consumption (17.1%). On the other hand, it is expected that energy (-24,4%), materials (-24.8%) and healthcare (-23.8%) experienced profit contractions.
However, these laggards are expected to experience a rebound in growth beyond this quarter, while the leaders are likely to experience a slowdown.
According to FactSet, 112 companies have issued EPS forecasts for the first quarter of 2024, of which 79 companies have given their guidance downward, while 33 upward. This puts the N/P ratio (negative to positive) at 2.4, well above the long-term average (Figure 3).
Chart 3: Negative/positive EPS ratio
"No landing", surprises and expectations.
The market has been lowering its expectations for the first quarter since the beginning of the year. However, the market expects earnings to accelerate thereafter. In fact, EPS expectations for 2024 and 2025 have been sharply increased by analysts in February-March, when macroeconomic figures have started to favor a "No Landing" scenario.
Knowing that the P/E of the S&P 500 is currently at 20x and that its long-term average level stands at 18x (chart 4), the market is currently at a premium of 10-12%.
Chart 4: S&P 500 Fwd P/E Ratio
According to BCA Research, for the current valuation level to be justified, earnings growth over the next 12 months would have to exceed 15% (chart 5). Only significant positive surprises could drive the market higher.
Chart 5: EPS growth required for S&P 500 price target
What opportunities do we see?
The 2024 first quarter earnings season may not show resounding growth, but it will provide valuable insights into business adaptation to the economic environment.
Investors should keep an eye on current market trends and conditions. Although a positive surprise would be welcome, the market seems to have already adjusted its expectations for the year.
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