Fourth-quarter earnings season is kicking off with a mix of good and bad news. The bad news: Earnings estimates for the S & P 500 in the fourth quarter have dropped considerably, from an 11% expected gain on Oct. 1 to 4.4% today, led by large declines in health care (from a gain of 2.4% expected Oct. 1 to a decline of 19% today, with large declines from Pfizer, Merck, and Moderna ) and financials (from a gain of 11.7% expected to a gain of 5.3% today), as well as Industrials. The good news: This has considerably lowered the bar for many corporations in these sectors, making it easier to beat and surprise the Street. More good news: The largest tech stocks are expected to report strong earnings. Savita Subramanian, head of U.S. equity and quant strategy at Bank of America, noted that Nvidia, Amazon, Meta, Alphabet, Microsoft and Apple will be the biggest drivers of EPS growth in the fourth quarter, up 56% year-over-year. Without those six stocks, the rest of the S & P is expected to see earnings fall 6%. More good news: Of the 29 companies in the S & P 500 that have reported earnings to date for the fourth quarter, 93.1% have reported above analyst estimates, according to LSEG, way above the long-term average of 66.6%. The bad news: Early filers are reporting revenues lower than expected. High-profile revenue misses have already come from Nike, FedEx, General Mills, Wayfair, CarMax, PayChex, Conagra, Darden, and Constellation Brands. Because of this, analysts have started lowering first-quarter estimates for many of these companies. Guidance has also been off to a disappointing start. Delta cut guidance, for example. Microchip Technology lowered forecast for Q3 revenue, citing lower shipment levels and a weak economy. Mobileye also said it was expecting a 50% drop in revenue in the first quarter. Samsung Electronics reported lower operating profit , due to subdued consumer demand. “We are measuring a weakening trend in EPS estimate revisions,” Nick Raich, founder at CEO at Earnings Scout said, in a note to clients last week. “The biggest risk is NOT a reacceleration of inflation or hawkish Fed but instead earnings encountering more pressure than anticipated from cooling growth and waning pricing power,” Adam Crisafulli, founder of Vital Knowledge, said in a note to clients last week. There’s a lot riding on earnings in 2024 For the S & P 500 to increase in 2024, earnings need to expand. 2023 earnings are expected to be up a paltry 2.9%, according to LSEG. But with the S & P 500 up over 20% last year, the forward earnings multiple is roughly 19.6, in the very pricey range. Current expectations are for an earnings gain of 11 in 2024, led by big gains in the largest sectors: S & P 500 sectors: expected earnings gains in 2024 Technology up 16.0% Health care up 17.6% Financials up 7.1% Consumer discretionary up 11.4% Source: LSEG So far, Wall Street does not seem overly worried, but it is very early. That 11% estimate is only slightly lower than the 12.1% estimate on Oct. 1. BofA’s Subramanian does “expect 4% downside to consensus EPS for 2024,” but she argues “we do not think it’s a compelling reason to be bearish equities.” We need higher revenues The biggest risk to higher earnings is lower revenue growth. Without higher revenues, companies will be forced to cut costs to get to a growing bottom line. Watch for the double whammy of deteriorating pricing pressure and lower demand. Some companies are betting that lower prices might stimulate sales volumes, but for many companies, they’ll see weaker demand and lower sales prices. Still, even a beat of 4.4%, the current consensus, leaves room for the usual surprises. Deutsche Bank’s chief U.S. equity and global strategist Binky Chadha is expecting “strong beats of 8.7% in aggregate, well above the 5.0% average historically” for the S & P 500 this season. CFRA chief investment strategist Sam Stovall also points out that only twice in the past 58 quarters (almost 5 years) have the S & P 500’s overall earnings disappointed the Street.
