Daily Management Review

2024 Will See An Acceleration In US Profit Growth Despite Economic Risks


2024 Will See An Acceleration In US Profit Growth Despite Economic Risks
Analysts expect that when inflation and interest rates decline in 2024, U.S. business earnings will rise more quickly; nonetheless, concerns about a faltering economy remain.
According to projections compiled by LSEG, S&P 500 earnings are predicted to rise 11.1% overall in 2024 after increasing by a moderate 3.1% in the previous year.
However, strong earnings growth is required to justify high stock valuations. Based on LSEG Datastream data, the S&P 500 index is currently trading at 19.8 times ahead 12-month earnings forecasts, significantly higher than its long-term average of 15.6 times.
A strong year-end rally was fueled by falling interest rates, particularly after the Federal Reserve in December hinted at interest rate decreases in 2024 following a programme of rate hikes that began in 2022. 
December saw the Dow Jones Industrial Average close at a record high for the first time since January 2022, and the S&P 500 is getting close to reaching an all-time closing finish. For the year, the S&P 500 increased by 24.2%.
"The market trading where it is at current levels demands earnings to show strong growth next year," said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.
The enduring impact of rising interest rates on the economy and corporate profits is one of the worries for 2024, he stated.
The third quarter saw an acceleration of economic growth, as the U.S. government affirmed in December. In its final estimate, the Bureau of Economic Analysis (BEA) of the Commerce Department stated that the gross domestic product grew at an annualised rate of 4.9% over the previous quarter.
As businesses start to release their fourth-quarter financial statements and provide predictions for the upcoming first quarter and the remainder of 2024, profit forecasts may continue to decline. Midway through January, the fourth-quarter results release will pick up speed.
"We're definitely seeing those (first quarter) estimates weakening at a faster pace," said Nick Raich, chief executive of The Earnings Scout. "Look at a name like FedEx, and that's a good bellwether of the global economy."
A day after the package transportation company revealed profits for the quarter ending Nov. 30 that fell short of analysts' expectations and lowered its full-year sales forecast, FedEx shares plunged 12.1% on December 20.
According to LSEG data, the estimated year-over-year earnings growth for S&P 500 businesses in the first quarter of 2024 is 7.4%, down from 9.6% on October 1. S&P 500 earnings are expected to climb by 5.2% in the fourth quarter of 2023, compared to an 11% increase on October 1.
Investors do, in fact, view a decline in inflation as a major advantage for businesses in 2024.
"The consumer still seems to be healthy, inflation is getting better, employment is still strong, interest rates are going down and gas at the pump is going down," said Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas.
Additionally, "these companies have streamlined their businesses and margins are decent," according to him.
According to a recent Commerce Department report, U.S. prices decreased in November for the first time in more than three and a half years, bringing the annual increase in inflation even below 3%.
Companies whose outcomes and prospects are dependent on AI technology will probably continue to benefit from optimism over the advancement of AI.
"While the rebound in TECH+ (earnings per share) began in 2Q23, earnings for the rest of the market are expected to follow in the year ahead," Jonathan Golub, chief U.S. equity strategist & head of portfolio analytics at UBS Investment Research, wrote in December.
According to S&P Dow Jones Indices senior index analyst Howard Silverblatt, the "Magnificent 7" group of megacap stocks—Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Meta Platforms, and Tesla—accounted for 62.18% of the S&P 500's overall performance in 2023.
The argument for a decline in the value of the US dollar, which would increase the competitiveness of American exporters' goods overseas, has also been strengthened by the Fed's recent dovish turn.
However, it's yet unclear if 2024 earnings projections are overly optimistic about these developments.
"The market is assuming a near-perfect landing with inflation cooling without a significant impact to demand and pricing power — not likely in our view," J.P. Morgan equity strategists wrote in their 2024 outlook.
"Current consensus S&P 500 forward EPS growth at 30%ile (+11%)... is in harmony with a Goldilocks outlook for growth and inflation.