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Week 2: Earnings Update

According to this article today in the Wall Street Journal, the earnings recession is behind us now. That fact, coupled with declining interest rates should lead to a bang up year for stocks.



"Profits are growing again, and the Federal Reserve looks as if it will start cutting rates sometime this year. It is an unusual combination and, for the stock market, possibly a potent one"



FR Commentary:

Unusual indeed. I've pointed out several times and several ways that stocks almost always FALL when the Fed begins lowering interest rates. That has certainly been the case for the past 30 years. Yesterday, I posted a chart showing that stocks are 2007 overvalued relative to T-bonds on an earnings yield basis. Here is what the WSJ article above says about that:


"Almost always in the past, when the Fed has been cutting rates, profits were faltering. The so-called soft landing that occurred in 1995 was a notable exception"


In other words, ignore the rule and focus on the lone exception.


I decided to dig further into this topic to see where earnings "growth" really stands this quarter.


For that topic, we turn to Factset:



"Earnings Growth: For Q4 2023, the blended (year-over-year) earnings decline for the S&P 500 is -0.1%. If -0.1% is the actual decline for the quarter, it will mark the fourth time in the past five quarters that the index has reported a year-over-year decline in earnings"


"Earnings Revisions: On December 31, the estimated (year-over-year) earnings growth rate for the S&P 500 for Q4 2023 was 1.6%. Seven sectors are reporting (or are expected to report) lower earnings today compared to December 31 due to negative EPS surprises and downward revisions to EPS estimates"


"Valuation: The forward 12-month P/E ratio for the S&P 500 is 19.5. This P/E ratio is above the 5-year average (18.9) and above the 10-year average (17.6)"


"At this very early stage, the fourth quarter earnings season for the S&P 500 is off to a weak start"


"To date, the market is punishing positive earnings surprises reported by S&P 500 companies on average"


"Topic of the Week: 1

Are More S&P 500 Companies Issuing Negative EPS Guidance Than Average for Q4?"


"Yes"




FR Commentary:

As stated above, since the end of December which was only two weeks ago, the estimated earnings "growth" went from +1.6% to -.1% based upon last minute downward earnings pre-announcements.


This is the sector by sector growth rate:





This Factset article published January 8th goes deeper into sub-sectors and finds that banks are expected to post a -21% decline in earnings this quarter. Furthermore, regional banks are expected to see a -40% decline. Which is interesting, because regional banks just rallied +40% since the lows of October.


Normally, one could say that one sector cannot bring down the entire market, however we only have to go back one year ago when regional banks DID bring down the entire market.








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