CONTRADICTION: Earnings are back in pole position as the big stock market driver for 2024. After stock gains this year were led by re-rating valuations, that are now back above long-term averages. S&P 500 earnings growth forecasts are for a strong rebound to 12%, from this year’s 1%. Skepticism is high that we’ll see such an acceleration. With the contradiction of the building US economic slowdown and analysts typically cutting estimates as the year progresses. But the 2024 earnings drivers are less-GDP driven than normal, and earnings cuts are normally modest. We see double-digit profits growth healthily broadening from tech to healthcare and industrials.
FALL: Earnings growth estimates are typically cut during the year (see chart). In 68% of the last 25 years. As analyst optimism gradually meets the market reality. The rare big upside surprises have been driven by surprise policy support (tax cuts), impossible in the run up to the 2024 election, or a positive macro shock (like the GFC and covid rebounds) that is unlikely as the US economy cyclically cools. The average EPS cut is -7%. But excluding crisis extremes, falls to -2%. This would still leave S&P 500 on track to return to double-digit earnings growth in 2024.
DRIVERS: US GDP growth is forecast to slow from 2.6% this year to under 1% next. This has many doubting the sharp forecast acceleration in S&P 500 earnings growth. This growth is driven by broadening AI adoption, profit margin relief from lower inflation, and the soft-landing GDP outlook. Healthcare is seen leading earnings growth next year, rebounding 19% from its shock vaccines-led 20% fall this year. With Tech and communications seen growing over 15%. Commodities are also seeing a swing to modest growth after 20%+ profits falls this year. The biggest growth slowdown is forecast in TSLA and AMZN dominated consumer discretionary.
All data, figures & charts are valid as of 05/12/2023.