Welcome to RBC’s Markets in Motion podcast recorded February 12th, 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, 4Q23 reporting season stats are similar to what we’ve described over the past few weeks with fewer earnings beats than last quarter, muted stock price reactions following earnings prints, and further compression in the forecasted growth rate embedded in consensus earnings expectations for 2024.
- Second, in our review of last week’s S&P 500 earnings calls the tone was mixed on the macro, negative on China, and had a positive tilt on the consumer.
- Third, two of the charts in focus in our Europe/UK meetings last week included our chart showing how the earnings dominance of the top 7 names in the S&P 500 is fading (which may help spark leadership rotation down the road) and our chart showing how net bullishness on the AAII survey may be heading for a 2-standard deviation event (delaying the pullback we have been anticipating).
If you’d like to hear more, here’s another 5 minutes. Now, the details.
Starting with Takeaway #1: Steady Earnings Stats With Muted Stock Price Reactions and Compression in 2024’s Expected Growth Rate
With 4Q23 reporting season well over halfway done, we’ve taken another look at the stats we’re tracking. Here’s what’s jumping out to us right now:
- As has been the case throughout most of reporting season, 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. The gap between EPS beats (78%) and revenue beats (65%) is wide but not unprecedented.
- EPS beats are tracking lower for the Russell 2000 while revenue beats are now tracking flat vs. the last quarter.
- 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. Both of these trends are consistent with what we found last week.
- Small Cap companies posting earnings beats have been slight underperformers. Companies missing consensus EPS forecasts are underperforming to a lesser degree than usual, but trends here are worse than the last quarter.
- 2023’s S&P 500 EPS (a blend of actuals and estimates for outstanding companies) is now tracking at $224 (up slightly 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 as 2024 began. The anticipated growth rate for 2024 EPS is now tracking at just 8.5% vs. 11% a few weeks ago and a little more compressed than we saw last week.
- 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. We’ve noted in recent meetings this is a process the investment community has to work through.
- Most sectors are contributing to the upward revision to 2023’s forecasted growth rate, though it’s worth noting that Consumer Discretionary, Industrials, and the Top 7 stocks in the index are doing an outsized share of the heavy lifting. These areas have seen the biggest improvement in the anticipated 2023 growth rate since the start of the year. Similarly, most sectors are contributing to the compression in 2024’s forecasted growth rate, though it’s worth noting that there hasn’t been much change in the anticipated 2024 growth rate for the Top 7 stocks, something that helps explain their continued strength early this year.
Moving on to Takeaway #2: In our reading, the Tone has been Mixed on the Macro, Negative on China, and Positive on the US Consumer
Our team has continued to read through many of the earnings call transcripts of the S&P 500 companies that reported last week. Here are the themes jumping out:
- We’ve been highlighting how there has been a wide range of descriptions of the macro backdrop and outlook in company commentary. That remained the case last week as well. On the positive side, some companies emphasized inflection points, normalization, soft landing expectations, rebounds from inventory resets, the temporary nature of certain cost problems, healthy demand, and back-half recovery expectations. On the negative side, some companies emphasized the challenges of weather, China, softer consumption, restrained decision making, destocking, and general uncertainty. In our UK/Europe meetings last week, we were often asked what this wide range of views is signaling. We find the absence of new red flags noteworthy but also think it matters that we aren’t reading much about green shoots either. Generally, the underlying backdrop sounds pretty stable to us, and we suspect many companies are making a point to talk down earnings expectations which were extremely optimistic on the sell-side as 2024 got underway.
- China remained in focus in discussions of non-US markets and the tone generally remained quite negative. In some of our meetings last week, the topic of whether China has seen a bottom came up. We observed that in our transcript review we aren’t seeing anything that suggests to us that China is on the cusp of inflecting positively. But we do come away from our transcript reading with a sense that the negative view on China has become deeply consensus, making it a good time to ponder this question.
- Elsewhere in discussions of geography and geopolitics, the Middle East seemed to be coming up a bit more often than we remember in prior weeks. We think this is because the sector mix of the companies reporting has shifted with more representation from consumer companies.
- As has been the case throughout reporting season, the challenge of high costs remained in focus. Pricing seemed a bit more in focus than prior weeks.
- Given the shift in the sector mix, we felt like we got more color on the state of the US consumer last week than we had in prior weeks. As was the case with the macro backdrop discussion, commentary was mixed, and we haven’t really learned anything new. Among the companies we read, the tone tilted a little more positive than negative. On the negative side, companies highlighted how the lower-end consumer has struggled with inflation, declining confidence, increased caution, and less pricing power especially among lower-end consumers. On the positive side, expectations for lower interest rates were referenced along with the general resilience of the consumer. A more choiceful and value-conscious consumer was described, and some companies highlighted how they were holding on to the lower-end consumer despite the pressures they face. Some of the other specific comments that jumped out to us included the absence of a dramatic inflection, a bottoming mortgage market, a stable auto aftermarket, and the benefit of higher/increasing incomes. In our Europe/UK meetings last week, many of the investors we spoke with openly worried that the US economy is running so hot that rate cuts by the Fed may not happen this year or their timing may need to be pushed out. The consumer backdrop described in last week’s earnings call transcripts is likely contributing to this concern as much as some of the stronger-than-anticipated jobs and confidence data releases that we’ve seen in recent weeks.
Wrapping up with Takeaway #3: Top Charts In Last Week’s Europe/UK Meetings
- The first of these shows how the earnings dominance of the Top 7 names in the S&P 500 is fading. These charts by far were the ones that resonated most with the equity investors we spoke with last week. They show how EPS growth (based on consensus forecasts) is expected to stay positive but decelerate for the top 7 names in 2024-2025, while turning positive and accelerating for the rest of the S&P 500 over that same time frame. The gap between the two buckets is expected to shrink from 39% in 2023 to around 13% in 2024 and less than 3% in 2025. While that justifies premium valuations in the moment for the biggest names, it also helps to make the case for a broadening out of leadership in the market in the future unless those 2024-2025 gaps begin to widen again. If US GDP expectations continue to improve, it is possible it could provide a bigger lift to expectations for the S&P 500 ex the top 7, narrowing the gap further.
- The second of these highlights how net bullishness in the AAII survey may be headed for a 2-standard deviation event. We’ve been expecting a pullback in the US equity market based on the fact that net bulls in the weekly AAII survey came into the year +1 standard deviation above the long-term average (the S&P 500 is normally flat after this occurs), and the fact that this indicator has been oscillating between +1 and -1 standard deviations since last summer. But the S&P 500 has gotten new life from a reinvigoration of domestic economic expectations that has more than offset indigestion over the dialing down of Fed rate cut expectations. We found ourselves talking a lot more last week about how the S&P 500 tends to be down a little 12 months later when the +2 standard deviation mark is breached. In our view, a pullback sooner rather than later would be good news.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.