| 13 June 2024, Thursday |

Wall St Week Ahead Sluggish US earnings may need pick-me-up to support 2023 stock rally

Stock investors have been satisfied by middling U.S. corporate results so far this year but they might not be so easy to please for the rest of 2023.

As the second-quarter earnings season winds down, S&P 500 results are presenting a mixed picture, with companies beating analysts’ profit expectations at the highest rate in nearly two years even as revenue beats dropped to the lowest since early 2020.

Investors appear content with that, for now. The S&P 500 (.SPX) has edged higher since earnings season began in July, with the benchmark index up 16% in 2023. But expectations call for corporate profits to pick up as the U.S. economy has so far defied recession fears, and investors may be far less forgiving if companies fail to deliver later this year, given the jump in equity valuations.

“Markets are expecting earnings to … deliver above and beyond where they have been,” said Eric Freedman, chief investment officer at U.S. Bank Asset Management. “This is a market that has moved up in anticipation of earnings that we have not quite gotten yet.”

Overall, second-quarter earnings are expected to have fallen 3.8% from a year earlier, Refinitiv IBES data showed. That decline follows a 0.1% rise in the first quarter and a 3.2% drop in the fourth quarter of last year.

Results are expected to improve, however. Third-quarter S&P 500 earnings are seen rising 1.3% on a year-over-year basis, according to Refinitiv, before a 9.7% fourth-quarter earnings rise and a 11.9% full-year increase in 2024.

Meanwhile, the S&P 500 has become more richly valued. The index was trading at 19.1 times forward 12-month earnings estimates as of Thursday, compared to its long-term average of 15.6 times, according to Refinitiv Datastream. The P/E ratio ended 2022 at just below 17 times.

This year’s valuation expansion accounted for 86% of the S&P 500’s year-to-date return through July, with the rest of the market’s boost coming from positive changes to earnings estimates, an analysis by Credit Suisse equity strategists showed.

“At this point, valuations have run ahead of the fundamentals and so companies now have to prove that they can generate earnings growth,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial.

  • Reuters