Why Are Earnings Estimates Like New Year’s Resolutions?

Review the latest Weekly Headings by CIO Larry Adam.

Key Takeaways

  • Earnings growth likely to remain below average in 4Q
  • Downward revisions to 2024 estimates to come
  • Tech-related sectors a standout in 4Q

The start of a new year brings the annual tradition of setting a new goal. Whether you choose to commit to a family, finance, health or personal goal is a matter of choice, but the promise of becoming a better version of yourself entices all of us. While enthusiasm about sticking to a New Year’s resolution is greatest at the start of the year, it often fades as the year progresses. Which got me thinking, New Year’s resolutions are like earnings estimates—they start strong at the beginning of the year as analysts are most optimistic, but typically move lower over the course of the year. Historically, over the last fifteen years, S&P 500 earnings have been revised lower throughout the year by ~4%. As 4Q23 earnings season kicks off this week and 2024 earnings come into focus, here are some of our initial thoughts.

  • Positive, but muted earnings growth | Currently, consensus earnings growth is expected to be 1.3% YoY for the fourth quarter, which would mark a deceleration from 3Q (+6.1%). However, it is worth noting that if earnings ‘beat’ estimates at their historical magnitude (~4 to 5%), they may outpace the growth rate seen in third quarter. Even if it does, EPS growth will likely remain below the 10-year average (+8.6%), which is consistent with the weaker economic environment we are experiencing. Stripping out the Energy sector provides a slightly more optimistic picture, with S&P 500 earnings ex-Energy expected to rise ~5%. The top-line tells a similar picture of moderate growth, with sales growth expected to rise only 3.4% in 4Q.
  • Low bar after downward revisions could increase volatility | Despite resilient economic activity and the best quarterly return of the S&P 500 (+11.7% in 4Q23) since 4Q20, 4Q S&P 500 earnings estimates have seen sharper downward revisions relative to history. In fact, in the 12-weeks leading up to 4Q earnings season, the S&P 500’s quarterly earnings have been revised down ~6.7%—that’s nearly double the previous ten-year average and sets up a very low bar to ‘beat.’ As a result, with valuations already trending near the upper end of their historical range, any earnings misses or disappointing outlooks for 2024 are likely to lead to negative price volatility over the next few weeks. Case in point: some of the early reporters that provided weaker guidance (e.g., Fedex, Nike) significantly underperformed the broader market in the three days following reporting results.
  • Downward revisions to 2024 EPS to come | In comparison, 2024 S&P 500 estimates have held relatively steady, with earnings estimates only ~1% lower over the last three months – less than half the typical revision that occurs during this period. And with the market growing more optimistic about a soft landing, consensus earnings have remained near $245/share. However, our call for a mild recession tempers our earnings forecast. We expect downward revisions to pick up as we move through earnings season, with EPS likely to end the year at $225/share (~2% EPS growth vs. 2023).