by Caroline Valetkevitch
NEW YORK (Reuters) – U.S. corporate profits are expected to accelerate this year amid falling inflationary pressures and interest rates, analysts say, but slowing economic growth is raising doubts about their profits. perspectives.
According to analyst estimates compiled by LSEG, profits of companies in the S&P-500 index are expected to increase overall by 11.1% in 2024, following a modest rise of 3.1% last year.
The S&P-500 currently trades at 19.8 times the 12-month expected earnings of its component companies, well above its long-term average of 15.6, according to data from LSEG Datastream. Sustained growth in corporate profits is therefore necessary to justify such a valuation, which notably benefited at the end of 2023 from announcements by the American Federal Reserve (Fed) paving the way for a reduction in interest rates this year.
The three main Wall Street indices notched nine consecutive weekly gains at the end of 2023, allowing the Dow Jones to end the year as a whole up 13.7%, while the S&P-500 and the Nasdaq jumped respectively. of 24.2% and 43.4%.
“Current valuation levels require strong earnings growth next year,” said Sameer Samana, market strategist at Wells Fargo Investment Institute. He notes, however, that the persistent effect of high interest rates on the economy will be a cause for concern for 2024.
Official data confirmed in December that economic growth in the United States accelerated in the third quarter, with gross domestic product (GDP) up 4.9% at an annualized rate.
But the fourth quarter could prove more difficult given the profit estimates published by certain companies and the indications given for the first quarter of 2024 and the rest of the year.
“We clearly see these (first quarter) estimates weakening at a faster rate,” said Nick Raich, chief executive of The Earnings Scout. “A group like FedEx is a good indicator of the global economy,” he added.
FedEx stock fell 12.1% on December 20, the day after the package delivery group published quarterly profit below analysts’ expectations and lowered its revenue forecast. for the whole year.
Estimated year-over-year earnings growth for S&P-500 companies for the first quarter of 2024 is now 7.4%, up from 9.6% reported on October 1, according to LSEG data. For the fourth quarter of 2023, profits of S&P-500 companies are expected to have increased by 5.2%, a slowdown from the 11% growth seen on October 1.
TOO MUCH DATA
Investors, however, see the slowdown in inflation as a very positive element for businesses in 2024.
“The consumer still appears to be in good shape, inflation is improving, employment remains solid, interest rates are expected to fall and gas prices at the pump are falling,” says Gary Bradshaw, portfolio manager at Hodges Capital Management.
Furthermore, “these companies have streamlined their operations and the margins are decent,” he added.
Prices in the United States fell in November for the first time in more than three and a half years, bringing annual PCE inflation below 3%, according to the latest official data.
The outlook on the potential of artificial intelligence (AI) should continue to support businesses.
“If the rebound in new technologies began in the second quarter of 2023, the rest of the market should follow over the coming year,” Jonathan Golub, chief US equity strategist at UBS Investment Research, wrote in December. subject of corporate profits.
The “Magnificent 7” group, made up of stocks with large market capitalizations – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla – represented 62.18% of the total return of the S&P-500 in 2023, Howard calculates Silverblatt, an analyst specializing in indices.
Additionally, the Fed’s recent dovish turn has strengthened the case for a weakening dollar, which would make U.S. exporters’ products more competitive abroad.
But as the profit forecasts for 2024 are based on a perfect alignment of too much data, doubt remains permissible for some analysts.
“The market is assuming a near-perfect landing with inflation slowing without a significant impact on demand and pricing power – which is not likely in our view,” JPMorgan equity strategists write in their outlook for 2024.
(Report by Caroline Valetkevitch; French version by Claude Chendjou, edited by Kate Entringer)
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