Today we’ll focus on 2024 earnings: The union of the “haves and have nots”

 

Full-year earnings growth trajectory is very important. Growth rates for the Magnificent 7 and non-Mag 7 stocks are expected to converge—a positive sign. But there are some lingering second-half earnings risks to keep in mind.

 

The U.S. equity market is approaching the start of Q1 earnings season following one of the strongest five-month rallies in history. With the S&P 500 up 26.6 % since the October low, with a lot of good news has been baked in. This has established a higher hurdle for Q1 earnings results, and when this happens, some high-profile companies usually stumble trying to clear the bar.

 

Regardless of the Q1 earnings results and the market’s reaction, the full-year 2024 earnings trajectory is more important to long-term investors - a notable, positive shift is taking place.

 

 

 

The consensus forecast expects earnings growth for the technology-oriented Magnificent 7 stocks (the “haves” for over a year) to decline meaningfully in 2024 mainly due to very challenging year-over-year comparisons. This is not a negative development—it’s common following ultra-strong growth. In contrast, earnings growth for non-Magnificent 7 stocks (the “have nots” for much of 2023) is expected to pick up— finally !

 

The two growth rates should nearly converge to around 14 % by Q4 2024, according to Bloomberg consensus estimates, which would be well-above average. This supports the thesis that market performance has broadened since late October 2023. Prior to that time, the Magnificent 7 stocks within the Information Technology, Communication Services, and Consumer Discretionary sectors dominated in share price performance. These stocks and sectors rallied sharply as earnings growth prospects and results surged. However, since the October low, five S&P 500 sectors that don’t include any Magnificent 7 stocks have climbed 17 % or more and all 11 sectors have risen by double digits.

 

In other words, the market has been anticipating the earnings growth convergence between the haves and have nots, and this has been reflected by the broad rally over the past five months.

 

When it comes to 2024 earnings estimates, the challenge is that consensus expectations are still back-end loaded. Estimates for S&P 500 earnings in the second half of the year look lofty. 2024 earnings growth trajectory is highly dependent on GDP growth staying resilient, near or above the 2.6 % long-term average and without negative inflation or employment developments. While this scenario is possible, economic vulnerabilities linger, and recession risks should not be ignored.

 

Earnings estimates also seem to be assuming that Federal Reserve policy will turn dovish with multiple interest rate cuts. Among S&P 500 sectors, we have strong doubts that the Health Care sector will meet the 2024 consensus forecast. Earlier this week negative Medicare reimbursement rate news dented earnings prospects for managed care companies, and further estimate markdowns could occur during the Q1 reporting season. Health Care’s 15.1 % consensus growth forecasts are likely to come down, potentially notably, given this forecast was issued just prior to the Medicare reimbursement news. Less robust Health Care growth could be balanced out by other sectors.

 

Full-year 2024 consensus growth estimates look straightforward for Financials, Industrials, Energy, and Materials; they seem achievable or beatable. We still see scope for further market gains this year as long as the economy remains resilient, and the Fed is inclined to cut rates. But it would not be unusual for the market to take a breather or pull back at some point following such a strong run. Corrections of around 10 % tend to happen often in any given year.

 

We would maintain Market Weight positions in equities to balance the risks and opportunities.

 

As always, please let me know if you have any questions or comments.