In a promising turn of events, financial analysts are predicting a substantial surge in US corporate earnings for 2024, surpassing the modest 3.1% increase witnessed in 2023. While this forecast is welcomed news for investors, persistent concerns about the economy and future economic growth linger, casting a shadow on the overall outlook.
Despite the optimism among analysts, there is a cautious undertone regarding the necessity for significant earnings growth to sustain the prevailing high stock valuations, which already exceed the long-term average. Market experts project a notable 11.1% surge in US corporate earnings for 2024 among companies listed on the S&P 500, representing a substantial improvement from the modest 3.1% growth witnessed this year. However, this projection has investors on edge, questioning whether these earnings will be sufficiently robust to maintain the current elevated stock valuations.
Presently, the S&P 500 index is trading at 19.8 times forward 12-month earnings estimates, well beyond its long-term average. The lofty valuations underscore the demand for strong earnings growth, making it a pivotal factor influencing the stock market’s trajectory in the forthcoming year.
A primary concern for 2024 revolves around the lingering impact of higher interest rates on both the economy and corporate earnings. The Federal Reserve’s indication of potential interest rate cuts in 2024 may have contributed to a recent market rally, but it also underscores the profound effect of interest rates on earnings. The Federal Reserve’s campaign to raise rates, initiated in 2022, has left a lasting imprint on the economy and corporate earnings. As companies unveil their fourth-quarter results and provide guidance for the coming year, apprehensions about the repercussions of higher rates on earnings are likely to remain a key focal point.
A glimmer of hope for 2024 emerged with the US government’s recent report confirming a 4.9% increase in economic growth in the third quarter. However, concerns persist regarding potential downgrades to profit estimates as companies release their fourth-quarter earnings and offer projections for the first quarter of the upcoming year. The apprehension is palpable, evident in the decrease of earnings projections for S&P 500 companies in the first quarter of 2024 from 9.6% growth on October 1st to the current 7.4%.
Despite these challenges and uncertainties, certain positive indicators for corporate earnings in 2024 are discernible. Cooling inflation stands out as a factor that could bolster companies’ earnings. Moreover, the optimistic outlook for the growth of artificial intelligence, particularly in the technology sector, could further contribute to corporate performance. Additionally, the recent dovish shift by the Federal Reserve increases the likelihood of a weaker US dollar, potentially enhancing the competitiveness of US exporters in the global market.
Nonetheless, certain experts remain skeptical, questioning the extent of optimism in the forecast for US corporate earnings in 2024. Reuters reported that J.P. Morgan equity strategists caution that current market projections hinge on a “near-perfect landing” scenario, with inflation cooling without significantly impacting demand and pricing power. This scenario, they argue, is improbable, and the prevailing consensus for S&P 500 forward EPS growth may be overstated, aligning more with a “Goldilocks” scenario for growth and inflation that may not be entirely realistic.
In conclusion, while the anticipated uptick in US corporate earnings for 2024 sparks optimism among investors, concerns about the economy and future economic growth persist. Positive indicators such as cooling inflation and advancements in artificial intelligence suggest potential growth, but maintaining a realistic perspective on the market and potential challenges remains crucial. The precision of the forecasts for US corporate earnings in 2024 remains uncertain, yet one certainty stands out – earnings will play a crucial role in shaping the stock market’s performance in the upcoming year.
