Investment Strategy Brief:
Q4 Earnings: A Frosty Forecast

Below is a transcript of this week’s video.

Hi, this is Jason Pride, Chief of Investment Strategy & Research at Glenmede.

With Q4 now in the books, investors will be turning their attention to the beginning of earnings season, as banks kick-off reporting this Friday. If estimates hold, Q4 will mark the second consecutive quarter of positive growth, but current consensus estimates suggest that growth rate may actually be quite modest.

Analysts have been getting incrementally less optimistic throughout the quarter. Bottom-up estimates for the S&P 500’s year-over-year earnings growth rate in Q4 fell from 9.2% at the end of September to 0.9% as it stands now, the largest decline since Q1 2023. Such a lower bar makes earnings surprises easier to come by but perhaps less impressive or meaningful to investors.

The earnings outlook for Q4 2023 shows a clear divergence across sectors. While six sectors, including Communication Services, Utilities, and Consumer Discretionary, are expected to report strong year-over-year earnings growth, five sectors, notably Energy, Materials, and Health Care, are predicted to face declines. This sectoral split underscores the uneven impact of current economic conditions across different industries, with some benefiting from prevailing trends while others struggle.

Now, expectations for 2024 call for much more robust fundamental growth, with bottom-up estimates of 11.5% growth this year, considerably better than the 0.2% growth rate for 2023. However, those 2024 growth expectations are contingent on the path taken by the broader economy. If the U.S. achieves the soft landing, 11.5% may be reasonable as the economy continues as normal, but if the long and variable lags of monetary policy deliver their typical headwind to the economy, downside risk remains to those projections. Current projections from wall street strategists as opposed to the analysts covering the individual companies hints at this downside.

Business surveys also appear aligned with this concern. The ISM manufacturing survey has remained in problematic territory into 2024 despite the modest recovery in corporate growth expectations. Historically, business surveys have been a more accurate leading indicator than analyst expectations.

So to summarize, while the earnings recession appears to have ended, estimates for the fourth quarter are far from robust and quite divergent. Estimates have again moderated prior to quarter end, lowering the bar for the official reporting season, so some surprises are likely. Annual earnings estimates appear to have stabilized, but strategists still appear less optimistic. Business surveys also still point to a less-than-robust outlook for corporate earnings. As a result, Investors are justified not to get too excited about the coming earnings season given ongoing recession risks.

Thanks for listening! And please don’t hesitate to reach out with any questions.