investment insights

    US earnings growth should underpin equities in 2024

    US earnings growth should underpin equities in 2024
    Edmund Ng - Head of Equity Strategy

    Edmund Ng

    Head of Equity Strategy
    Christian Abuide - Head of Asset Allocation

    Christian Abuide

    Head of Asset Allocation

    Key takeaways

    • A slowing, but reasonably resilient economy and peaking interest rates should position US equities for further gains in 2024
    • Third-quarter earnings provide some evidence that firms’ earlier rounds of cost-savings are now resulting in modest margin improvements
    • We anticipate a mild US slowdown next year leading to interest rate cuts in the second half of 2024
    • Our base case is for the S&P 500 to end 2024 around 4,800 points. We expect most of the upside will in the next six months, before the economy feels the full force of cumulative monetary tightening.

    For the first time in a year, the S&P 500’s corporations are growing their earnings per share (EPS) again, based on quarterly data that ended in September. A remarkably robust American economy is expected to slow, which in turn is feeding a market consensus that the Federal Reserve’s policy rate is peaking. We expect corporate earnings growth to remain positive into 2024, allowing room for US stocks to advance.

    The US benchmark’s stock index, the S&P 500, advanced by 20% through the end of July, then declined around 11% peak to trough, before recovering again in recent weeks. Part of that rebound may simply be that US consumer spending has remained strong, supported by rising real wages and a large proportion of fixed-rate mortgages shielding borrowers from higher interest rates.

    In contrast to the resilient US economy, corporate profits in the US have already experienced a recession, recording three quarters of year-on-year declines. While third quarter results were mixed versus expectations, EPS have grown for the first time in a year. This is often confusing, since the corporate sector and broader economy should be closely related.

    This apparent ‘divergence’ can be explained. First, profits in the S&P 500 skew more towards goods rather than services, hence an earlier decline in goods-sector activity has undermined profits more than the economy. Another explanation is that unlike the economy, corporate profits benefit from cost cuts in the short term.

    Firms have been making savings to maintain margins without wide-spread redundancies

    This is what we have seen in the latest earnings season, where EPS were better than expected despite ongoing disappointments in revenues. In other words, margins have been positively surprising investors. More notably, companies have been able to make savings to maintain their margins without wide-spread redundancies. In itself, that may be a reaction to the labour shortages experienced in the wake of the pandemic. Not all is rosy however, as management teams remain cautious about the future, as shown by a lower-than-average share of companies raising their outlooks.


    500-7 = 0

    Furthermore, excluding the so-called Magnificent Seven (Apple, Microsoft, Alphabet, Amazon, Meta, Tesla and Nvidia), the S&P 500 saw no change in the year through 31 October. These few stocks within the technology sector covering hardware, semi-conductors, and digital services, account for all of the index’s positive returns. If we follow just the S&P’s other 493 stocks, the Japanese TOPIX and Euro Stoxx have both outperformed the US index, posting 8% and 6% respectively year to date.

    For now, US financial markets are positioning for four interest rate cuts in 2024, starting as early as June. In this context, markets have treated slowing data on growth, jobs, or economic activity as indications that the monetary policy hiking cycle must be close to complete.

    Our base case is for the S&P 500 to finish 2024 around 4,800 points

    Our expectation is for the US to experience a mild economic slowdown next year, leading to two interest rate cuts from the Fed; a first in September and another in December 2024. We expect 6% EPS growth in the US as corporate margins continue their modest recovery, despite slower, but still positive nominal growth. Such below-market expectations (investor consensus is for 12% EPS growth) and potential negative earnings revisions could pressure valuations, but we expect a shift in monetary policy to offset that. Concretely, our base case is for the S&P 500 to finish 2024 around 4,800 points, from today’s 4,415, and we suspect most of the gains could come in the next six months, before the full, cumulative force of monetary tightening is felt by the economy later in 2024. (see chart).

    Read also: The US equity market: signals and scenarios for 2024

    Bears and bulls

    Equity markets appear to be at an inflection point, and at this stage it is impossible to rule out more extreme positive – or negative - developments.

    On the downside, it is possible that labour markets and consumption deteriorate in the coming month. Companies exposed to big-ticket consumer discretionary purchases, such as recreational boats & motorcycle, as well as companies catering to lower-income US consumers continue to provide a cautious reading on these segments. A classic economic recession in the US -- with consecutive quarters of negative growth, and more importantly high unemployment -- remains a possibility and the single most significant risk to our outlook for equities, as it would inevitably see EPS and margins contract with as much as a 17% decline in the S&P 500.

    Yet it is also not impossible that we see a more bullish environment - in which US manufacturing recovers more quickly, offering a boost to American equity markets. That would be in line with leading indicators such as October’s ISM Manufacturing sub-components, as well as the continuing recovery in semiconductor segment sales. In a scenario of a re-accelerating US economy, EPS might grow as much as 20% and revenues by more than 6% through 2024, along with some expansion in margins, taking them above their peak of 2018/2019.

    A re-accelerating US economy might take earnings above their 2018/2019 peak

    Read also: US economic outperformance is poised to narrow

    Higher corporate earnings in the European Union relative to the US have historically been the single most important factor for relative outperformance, and Europe’s banking and automotive sectors drove most of the earnings outperformance. European banks’ net interest margins expanded in 2023 amid rising rates, which boosted earnings, but should falter in 2024, in a slower growth and falling policy rate environment. Meanwhile, the transition to electric vehicles has been slowing in recent months, proving particularly tricky for mass market automakers’ profitability. Overall, we expect eurozone-listed firms to underperform next year, despite low valuations, with earnings growth of 0% in 2023 and 6% in 2024, and for the MSCI EMU index to end 2024 at 141, from 142 today.

    In emerging markets, we see evidence of weakness amongst companies having reported their results thus far, with 30% exceeding expectations and 40% disappointing consensus analyst expectations. Communication services and consumer discretionary delivered more positive surprises among the 11 sectors that we track, while cyclicals such as materials and industrials fared worse. Unsurprisingly, real estate was also weak amid declining house prices in China, although selected Hong Kong property firms delivered better than expected results. Unlike the US, we did not see an inflection in earnings, with annual EPS growth coming in at -3% for the quarter. Yet better-than-expected results and 2024 guidance from large cap Taiwanese and Korean technology companies was a potentially positive indicator for global manufacturing activities.

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