What is the outlook for corporate earnings?
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As the holiday season approaches, equity analysts will be high on my list of those I’m inviting for festivities. They tend to be a cheerful bunch. When they look to the year ahead, they almost always see that things will get better: that earnings will grow more strongly in the year ahead.
Is this optimism warranted? After broadly flat-lining this year, the current consensus is that corporate earnings have bottomed and will reaccelerate in 2024. The earnings of S&P 500 companies are expected to grow by 11%, those in the MSCI Europe ex-UK by 6%, and those in the FTSE All-Share by 7%.
Chart 1: Regional earnings expectations
Underneath these earnings forecasts is an expectation for both revenue and margins to improve. I am a little more cautious about both.
As discussed in our Investment Outlook 2024, we anticipate consumer spending will come under pressure next year. Although real wages are expected to improve across Western economies as the worst of the inflationary pressures ease, the impact of higher interest rates and a weaker labour market will increasingly be felt.
This will also put pressure on corporate pricing power. Corporate margins are down from the record high levels achieved in 2022 but remain elevated versus history.
Chart 2 - Profit margins
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The rise in corporate margins has had both cyclical and structural components. For the last couple of decades, companies have been able to bear down on costs thanks in part to technology and a lack of worker bargaining power. For the S&P, Trump’s 2017 Tax Cuts and Jobs Act also helped by significantly pushing down US corporate taxes.
More recently, margins were helped by a post-pandemic demand boom, which allowed firms to more than pass on the rising costs of energy, intermediate goods and labour. It is this cyclical support that we expect to at least partially reverse in 2024. ?
Overall, we think that earnings expectations will have to come down for next year. This is important when thinking about valuations that are based on forward earnings expectations. On current consensus earnings estimates, equity multiples are near or slightly below historical averages in most major markets, and a little above average in the US. However, a more sanguine earnings outlook would make developed market equities look more expensive. In this scenario, I’d prefer to be selective in global stock markets, with a focus on quality stocks that are more likely to withstand a period of earnings weakness.
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All data is sourced J.P. Morgan Asset Management as of 28 November 2023.
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CIO, Fundamental Equities EMEA at BlackRock
11 个月Agree that we need to focus on earning as well as the magnitude of any reductions and how much they might compress the multiple. But most importantly the dispersion of trims and the opportunity that provides for active investors….
Managing Director @ BlackRock | Investments, DEI
11 个月Interesting to see expectations flip back to starting optimistic and getting revised down closer to reporting season. Post pandemic it was upward revisions the closer you get to reporting especially in Europe.
Senior Wealth Manager at Citadel Finance SA
12 个月I would not be necessarily pessimistic. It is worth to remember that 12 months ago several strategists were expecting earnings to contract somehow 10% (at the end it will be more or less flat). We are still impacted by shocks that happened in the aftermath of Covid and the war in Ukraine. More importantly the more recent profit led shock that is unfolding and will lead some to reduce prices (i.e. inflation is mainly transitory and will keep receding). Also, inventories build up in 2023 seems to have normalized, hence demand will follow more closely growth. Consumers have no reasons to stop spending as outlook is fair with a good job market, some wage growth and still some excess savings available. All in all, revenues may not grow much but prices are also pressured, hence supporting margins. Several sectors have a good outlook (i.e. renewables, digitalization or infrastructure). I would therefore expect a moderate growth that can accelerate in 2025 and beyond. Let's keep in mind that AI is not a one-off effect but rather a slow but growing contribution to growth, expecting to add 1% to 1.5% to productivity by the end of the decade and removing some pressure from the job market.
Great question, especially given the current consensus view that calls for more than 11% EPS growth for SPX next year.
Excellent insights, Karen.