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Market Outlook

Annual Earnings Forecast for Q2-2024

Analysts forecast that the S&P 500 index’s earnings will likely grow above 12% for the second quarter and about 11-12% for the year to 247.

Source: FactSet

This is way above the 8% average growth, mostly because of a weaker Q2-2023, when earnings actually declined 4% over the previous year. 

Besides, S&P 500 earnings have been stagnant at $220 for the past two years so 2024 had beat the average significantly just to catch up and revert to the mean. 

Here are past 5 years – basically smoothening out the effects of Covid. After the big pandemic fall of 14% in 2020, there was that massive jump of 48% in 2021, and then two years of indigestion and inflation, which now leads to the 12% expected jump in 2024.

FactSet estimates that over the past ten years, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 6.8% on average – everybody sandbags, (under promises and over delivers). I wouldn’t be surprised if earnings actually close over $250 for 2024.

Great, earnings look good with the 11-12% increase, but what about valuations?

The bottom-up target price for the next 12 months for the S&P 500 is 6006.66, which is 7.6% above the closing price of 5,584.54. 

The Forward P/E Ratio is 21.4, which is above the 10-Year Average (17.9), and above the 5-year average of 19.3. 

The two main causes for the high P/E 

a) Out performance and AI expectations, from the Magnificent 7, which controls about 33% of the index.

b) Decline in inflation and expectations of interest rate cuts.

I believe there is exhaustion in the M-7 – there is over participation (everybody and their uncle own Nvidia) and over bought. We we saw it for a bit in the last 3 weeks with Nvidia slowing down, but Apple and Tesla picked up the slack – Tesla rose 40% and 7 days in a row! What looked like a possible correction in the middle of June, never really materialized.

Secondly, now the 10 year has finally come down to about 4.19% and two interest rate cuts are a certainly after benign inflation numbers (still high over 3% and above the Fed target of 2% but definitely in the right direction). I believe the 10 Year will be between 3.5% and 3.75% for the most of 2025, if not lower.

Strategy for the second half of 2024 and beyond. High valuations should keep the index in check, and even cause a 5-7% correction, which is actually a good thing in my opinion. Lower interest rates will keep a floor.

What should we do? In my opinion, 

  1. Lower expectations for sure, if we make a return of 8-10% a year + dividends, that’s great, thus with this target, we can lower risk as well. For most of the year, almost every stock I had recommended had expectation of at least 15% Returns.
  2.  You don’t have to necessarily move away from tech but a mixture of Growth At a Reasonable Price (the GARP strategy) and absolutely looking for and investing in bargains should be the cornerstone of investing for the next 12 months. In two cases recently, GitLabs (GTLB) and Samsara (IOT) waiting for bargain prices have worked very well. I started the first 5% purchase, higher and slowly worked my way down as they kept falling and in both cases the prices are 15- 20% higher than my average cost.
  3. Keep cash handy for corrections and drops – On June 19th, I had sold 15-20% of semi stocks as profit taking; I’m still holding onto about 10% cash, which at 4-5% in money market funds is safe and I won’t invest till I get an outstanding bargain.
  4. Rotation – This week I’ll identify and recommend some GARPS, some dividend picks, and cyclicals.
  1. I picked up Duolingo, consumer, which is expensive – about 40% invested but am adding in the 190 range.

I’ve been pyramiding in the two big pharma companies – Eli and Novo, which is the exact opposite of cost averaging, buying smaller quantities even as they get higher, simply this obesity craze will last, and they’re relatively inured with strong pipelines.

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Market Outlook

 Earnings season for Q2-2024

As usual, the first to report were the big banks. I always look at credit provisioning and charge offs as indicators of economic weakness. 

JP Morgan (JPM) confirmed guidance for the rest of the year for earnings and revenue; earnings growth will be less than 1%, while revenues will grow at a modest 5%. JPM did increase credit loss provisioning to $3.05Bn, higher than 2.8Bn earlier, this is also higher than 1.88Bn in Q1, and 2.9Bn in Q2. Charge offs (mainly on credit card delinquencies) were also higher by $820Mn at $2.2Bn. Jamie Dimon, CEO of JP Morgan, was cautious as usual, JPM tends to over-provide for losses and has been doing it for years.

Wells Fargo (WFC) didn’t need to increase provisioning, but its charge offs were also higher – net loan charge-offs, as a percentage of average total loans, increased to 0.57% from 0.50% in Q1 and 0.32% in Q2 2023.  WFC’s bigger problem is net interest income, it now expects full-year 2024 net interest income to fall 8%-9% from 2023’s $52.4B, compared with its prior guidance of down 7%-9%.

Citi (C) was mixed with higher charge offs but lower provisioning, and also commentary from the CEO, that lower FICO score customers are pulling back on spending. In addition, he’s seeing signs that delinquencies may be bending back down.

These don’t set off any alarm bells but does confirm what we’ve been hearing for most of the year, that outside of tech, the economy is lackluster, and that inflation is stunting growth, especially for lower and middle income groups.

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Media

Meta Platforms Earnings: A 20% Drop After Hitting the High Bar

Source:Meta

Meta Platforms (META)

The bar was too high for Meta to clear.

Post earnings the markets punished it 20% for a marginally weaker guidance and higher than expected CAPEX. Pre-earnings the stock had been up 130% for the past year, so this 20% drop was perhaps, overdue.

Rev beat of 36.46Bn v 36.12Bn 27% YoY – but too little a beat.

Rev guidance 36.5Bn to 39Bn or a midpoint of 37.75 V 38.24,  still 18.5% YoY growth but too much of a miss.

Capex is higher at 37.5Bn midpoint now V 33.5Bn – bad for Meta but good for Nvidia/AI  most of the Capex is for AI.

META has a GAAP operating profit margin of 49% in the family of apps business – that’s a phenomenal margin, but it drops substantially because of losses in the Reality Labs business. Still, its company-wide margin was 38% – a 52% increase YoY.

Will parse through the earnings call/analysts’ upgrades tomorrow morning, the selloff may be overdone.

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Market Outlook

S&P 500 Earnings Overview: Q4 2023 Insights and Valuation Metrics

source

FactSet reported the following for S&P 500 earnings through 2/9.

This is a very helpful 10,000 feet view and provides good benchmarking and comparisons.

Earnings Scorecard: For Q4 2023 (with 67% of S&P 500 companies reporting actual results), 75% of S&P 500 companies have reported a positive EPS surprise, which is below the 5-year average of 77% but above the 10-year average of 74%

Earnings Growth: For Q4 2023, the blended (year-over-year) earnings growth rate for the S&P 500 is 2.9%. If 2.9% is the actual growth rate for the quarter, it will mark the second-straight quarter that the index has reported earnings growth.

65% of S&P 500 companies have reported a positive revenue surprise, which is below the 5-year average of 68% but above the 10-year average of 64%.

In aggregate, companies are reporting revenues that are 1.2% above the estimates, which is below the 5-year average of 2.0% and below the 10-year average of 1.3%.  

If 3.9% is the actual revenue growth rate for the quarter, it will mark the 13th consecutive quarter of revenue growth for the index.

It is interesting to note that analysts were projecting record-high EPS for the S&P 500 of $243.41 in CY 2024 and $275.34 in CY 2025 on February 8. 

On February 8, the forward 12-month P/E ratio for the S&P 500 was 20.3, which marked the seventh time in the past nine trading days in which the P/E ratio for the index was above 20.0. How does this 20.3 P/E ratio compare to historical averages? 

Here is the chart for the historical PE, we have been above the 10 year average of around 18 for a while, and are now above the 5-year average of 19 as well.