Welcome to RBC’s Markets in Motion podcast, recorded February 5, 2024. I’m Lori Calvasina, head of US equity strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.
Three big things you need to know: First, with reporting season almost halfway done, bottom-up consensus expectations for EPS growth in 2024 have shrunk to 9% from 11% – a combination of better-than-expected results for 2023 and a modest dampening of enthusiasm for 2024’s outlook. Second, a murky macro backdrop, elevated costs, and China challenges have been in focus in recent earnings calls along with a better monetary policy outlook. Third, in our high frequency indicators, things that caught our attention included the worsening in the sentiment backdrop for stocks last week and mostly positive data regarding the health of the economy and labor market.
If you’d like to hear more, here’s another 5 minutes. Let’s jump into the details.
Let’s start with Takeaway #1: A Ho Hum Reporting Season Rolls On
With more than half of the S&P 500 still not yet in, the stats on 4Q23 reporting season remain very much in flux.
Here’s what’s jumping out to us right now:
- As was the case in last week’s update, the percent of S&P 500 companies beating consensus on EPS forecasts is still tracking a little lower than last quarter, even though the percent beating consensus on revenue forecasts has moved up a tiny bit.
- Both EPS beats and revenue beats are tracking lower for the Russell 2000.
- Within the Russell 1000, the companies posting earnings beats are outperforming the broader market slightly immediately post results in terms of their stock price reactions, but to a lesser degree than we saw last quarter. The good news is that companies missing consensus EPS forecasts also aren’t underperforming as much as usual.
- Small Cap companies posting earnings beats have been in-line performers. Here, too, the good news is that companies missing consensus EPS forecasts are underperforming to a lesser degree than usual.
- With more data now in, we’re getting a clearer picture of how the overall S&P 500 EPS stats and bottom-up forecasts are evolving. 2023’s S&P 500 EPS (a blend of actuals and estimates for outstanding companies) is now tracking at $223 (flat vs. 2022’s actual and up from the 2023 forecast of $221 to start the year). Meanwhile, 2024’s S&P 500 EPS forecast is now tracking at $243 – down from the forecast of $245 a few weeks ago. The anticipated growth rate for 2024 EPS is now tracking at just 9% vs. 11% a few weeks ago.
- As a reminder, we’ve been expecting some downward revisions to 2024’s bottom-up consensus EPS forecasts. Our own modeling, last updated in early January, has been anticipating 2024 S&P 500 EPS of $234. Our below-consensus EPS forecast has not been a major concern to us regarding market direction as forecasts are normally too high to start the year.
Moving on to Takeaway #2: Comments That Jumped Out To Use From Last Week’s Earnings Calls
Our team has continued to read through many of the earnings call transcripts of the S&P 500 companies that have reported looking for key themes.
- Collectively, Corporate America isn’t giving investors a consistent message on the macro backdrop and outlook. There’s been a wide range of views on how to characterize them, including “cautiously optimistic,” “moderately muted,” “muted,” “uncertain,” “optimistic,” “improving,” “similar to 2023,” “robust,” “strong,” “interesting,” and “complex.”
- Consumers continue to be described as resilient, healthy and strong for the most part.
- Discussions regarding inflation, costs, and labor/wages continued to emphasize them as challenges, but a few companies admittedly discussed how these headwinds were lessening.
- Geopolitics continued to be highlighted as a source of uncertainty.
Next, Takeaway #3: What Jumps Out From Our High Frequency Indicators
Two new things this week:
- Last week we highlighted the wide range of terms used to describe the macro backdrop. That persisted in our reading last week. On the positive side, companies highlighted 4thquarter improvement, positive megatrends driving demand, labor market strength, moderating recession risks, encouraging signs of normalization, and general resilience. On the negative side, companies highlighted economic uncertainty, complexity, heightened geopolitical risk, tighter sales budgets and longer sales cycles, judiciousness in consumer spending, fractured politics, funding challenges, China weakness, elevated costs, domestic layoff announcements, and the general need for caution. We were struck by one company that referred to the backdrop as “dismal.” The lack of consensus among companies on the outlook appears to be taking a toll on US equity investors, and it’s worth noting that we detected slightly more skepticism on the health of the economy and labor market in our conversations with equity investors at the beginning and middle of last week.
- Fed-related commentary generally emphasized the positives associated with the end of cuts and more certainty in the monetary policy outlook. Several companies noted positive impacts on demand/confidence while others highlighted the lower risks of recession.
- Higher costs remained in focus, along with expense management programs. That being said, comments on increased productivity and the benefits of lower attrition and improved staffing levels also jumped out to us in the labor discussion.
- The China discussion generally continued to tilt negative but we did note a few companies highlighting improved momentum or stabilization.
Wrapping up with Takeaway #3: What Else Jumps Out From Our High Frequency Indicators On Performance, Sentiment, and the Economy.
- On performance, the S&P 500’s trading in 2022-early 2024 continues to resemble 2002-early 2004, the period of messy normalization that followed the Tech bubble. There’s been a correlation of roughly 73% between the two time periods. At this stage in the 2002-2004 normalization, a pullback was about to begin though it’s worth noting that the S&P 500 still ended up +9% in 2004.
- On Sentiment, bulls bounced back in the weekly AAII survey of individual investors. Net bullishness rose to 24.6% last week taking the four-week average to 18.95%, a little less than one standard deviation above the long-term average. As a reminder, this indicator crossed the one standard deviation mark in early December and was still sitting around those levels as 2024 began. This has caused us to be on guard for a pullback in the US equity market in the near term, despite our constructive view on the year as a whole.
- Note that weekly data from CFTC on institutional investor positioning in US equity futures continues to signal caution as well. Buyside positioning in US equity futures broadly (on a notional dollar value basis) is sitting above early 2018 and 2020 highs, as well as 2021-2022 highs.
- Nasdaq futures positioning has now moved above the highs of 2013-2015 on a notional dollar value basis as well, highlighting the crowding risks that are sitting in the Large Cap Growth part of the market in particular.
- And on the economy, though still in negative territory, ISM manufacturing came in stronger than expected for January and above the prior month. The improvement seen here sends a positive signal for Small Caps (and the leadership rotation in the US equity market generally) as Small Caps tend to outperform Large Caps when ISM manufacturing is moving up.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
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