The fourth quarter earnings season for the S&P 500 is in full swing, offering investors insights into the financial health of the largest publicly traded companies in the United States. As we navigate through the early stages of this earnings season, it’s evident that it has kicked off on a relatively weak note. In this comprehensive analysis, we delve into the key findings, sector-wise performance, and what to expect as the season unfolds.
Lackluster Start to Earnings Season
The initial reports from S&P 500 companies for the fourth quarter of 2023 have been less than stellar. Notably, the percentage of S&P 500 companies reporting positive earnings surprises is currently below the historical average. Moreover, these companies are reporting actual earnings that fall short of analysts’ estimates when considered collectively. However, it’s essential to understand that this underperformance is primarily attributed to companies in the Financials sector.
The aggregate earnings reported for the fourth quarter are lower compared to the end of the previous week and the end of the quarter. Consequently, the S&P 500 is witnessing a year-over-year decline in earnings for the fourth time in the past five quarters.
Dissecting the Early Earnings Reports
As of now, only 10% of the companies in the S&P 500 have reported actual results for Q4 2023. Of these early reporters, a modest 62% have managed to surpass analysts’ expectations concerning earnings per shareEarnings per share (EPS) is a fundamental financial metric that provides valuable insights into a company's profitability. This widely used indicator helps investors and analysts g... (EPS). While this may seem like a respectable figure, it falls below both the 5-year and 10-year averages.
However, the most concerning aspect is that companies, in aggregate, are reporting earnings that are substantially lower—18.1% below, to be precise—than what analysts had estimated. This significant deviation from estimates is below historical averages.
The Role of the Financials Sector
Negative earnings surprises originating from companies within the Financials sector have played a substantial role in driving down the overall earnings for the index over the past week and since the end of the quarter. The performance of this sector has weighed down the broader earnings picture.
Sector-wise Performance
When we look at individual sectors, the results vary considerably:
Sectors with Year-Over-Year Earnings Growth
- Communication Services
- Utilities
- Consumer Discretionary
- Information Technology
Sectors with Year-Over-Year Earnings Decline
- Energy
- Materials
- Health Care
- Financials
The Consumer Staples sector is reporting flat year-over-year earnings.
Revenue Performance
In terms of revenues, 62% of S&P 500 companies have reported actual revenues above estimates. While this seems respectable, it falls below both the 5-year and 10-year averages. On aggregate, companies are reporting revenues that are just 0.5% above estimates. Again, this underperformance in revenues is below historical averages.
Analyzing the Revenue Growth Rate
The blended revenue growth rate for the fourth quarter currently stands at 2.9%. This figure has remained consistent since last week and is slightly lower than the revenue growth rate of 3.1% recorded at the end of the fourth quarter.
Notably, downward revisions to revenue estimates and negative revenue surprises from companies in the Energy and Financials sectors have been the primary factors contributing to the decrease in overall revenues for the index since the end of the quarter.
A Continued Streak of Revenue Growth
If the current 2.9% revenue growth rate holds, it will mark the 13th consecutive quarter of revenue growth for the S&P 500 index, highlighting its resilience.
Looking Ahead
As we look ahead, analysts are optimistic about the future. They anticipate year-over-year earnings growth of 5.4% for Q1 2024 and an impressive 10.0% for Q2 2024. When considering the entire calendar year 2024 (CY 2024), analysts project year-over-year earnings growth of 12.2%. These expectations underscore the belief that companies will recover and thrive in the coming quarters.
Valuation Metrics
In terms of valuation, the forward 12-month Price-to-EarningsThe price-to-earnings ratio, often abbreviated as P/E ratio, is a fundamental metric used by investors and analysts to evaluate the relative value of a company's shares in the stoc... (P/E) ratio currently stands at 19.5. This figure is above both the 5-year and 10-year averages, indicating that the market may be pricing in higher expectations for future earnings. Notably, this P/E ratio aligns with the figure recorded at the end of the fourth quarter.
What Lies Ahead in the Earnings Season
As we progress further into the earnings season, investors will closely watch the reports from 75 S&P 500 companies scheduled to release their results for the fourth quarter. Among them are 10 Dow 30 components, which carry significant weight in the index and can impact overall market sentiment.
In conclusion, the Q4 2023 earnings season for the S&P 500 has had a subdued start, with earnings falling short of estimates in aggregate. The Financials sector has been a notable contributor to this underperformance. However, sector-wise variations exist, with some segments showing year-over-year earnings growth. The future outlook remains positive, with analysts anticipating robust earnings growth in the coming quarters. Investors will continue to scrutinize earnings reports and economic indicators as the season unfolds, seeking valuable insights into market trends and corporate performance.
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