Stocks just had their best month in more than a year. It’s easy to credit the gains to the market’s conviction that the Federal Reserve is done raising interest rates. Don’t forget about earnings.
The
S&P 500 index
rose 0.8% this past week, finishing November up 8.9%, its best month since July 2022. The
Nasdaq Composite
added 0.4%, and the
Dow Jones Industrial Average
gained 2.4%, reaching its highest level since January 2022.
Yes, these gains have occurred as the market started pricing in not only the end of the Fed’s rate hikes, but also a greater possibility of lower rates next year—futures pricing calls for a cut by the early spring, per CME’s FedWatch Tool. Earnings, though, have been an understated contributor to stocks’ big month.
Remember those? Third-quarter earnings season wrapped up this past week with mostly retailers and a few technology companies. It’s time to start drawing conclusions. The most obvious one: The earnings recession is over.
S&P 500 companies’ third-quarter net income was 4.1% higher than a year earlier, after three straight quarters of declines, according to Refinitiv. Earnings per share were up 7.1%, thanks to stock buybacks.
As is usually the case, what management teams had to say about the future mattered more. There, the record was more mixed, particularly for firms exposed to U.S. manufacturing—the auto workers’ strike loomed—and for some retailers worried about the durability of consumer spending.
Accordingly, analysts have tempered their estimates. Yardeni Research’s Edward Yardeni compiles a Net Earnings Revisions Index, or NERI, to measure trends in analysts’ forecasts. A positive NERI means that more analysts are revising their estimates higher than lower, and vice versa.
The S&P 500’s NERI turned negative in November for the first time in seven months. Energy was the only S&P 500 sector with a positive NERI, but it isn’t like the sky is falling. “That’s not to say they aren’t bullish,” Yardeni wrote. “Their consensus Y/Y growth rate forecasts for revenues and earnings remain solidly positive for all of the quarters through the end of 2024.”
For now, analyst consensus calls for $245 in S&P 500 earnings per share next year, which would be growth of more than 11%. Compare that with overall flattish earnings so far in 2023. It implies a meaningful reacceleration in profit growth, even as the economy is almost guaranteed to slow from this year’s torrid pace. Some find that optimistic.
“I think that’s too high,” says Ann Miletti, head of active equity at Allspring Global Investments. “The Magnificent Seven stocks that have driven practically all [of the earnings growth in 2023] would have to repeat that, and the other 493 stocks also have to catch up. It’s a big number.”
And that has Miletti going where the growth is. She likes healthcare, which is projected to have the fastest earnings growth in the S&P 500 next year, at 20%, as it rebounds from a similar decline in 2023. She credits the sector for its ability to sail through an uncertain economic environment, quality balance sheets, and relatively cheap valuations, and points to
Charles River Laboratories International
and
Laboratory Corp. of America Holdings,
in particular, as stocks to watch.
For now, though, the combination of rosy projections and lower expected interest rates boosting valuation multiples is more than enough to keep the S&P 500 climbing.
We’ll worry about next year’s earnings next year.
Write to Nicholas Jasinski at [email protected]
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