As companies gear up for the earnings season, Wall Street strategists anticipate widespread beats on analyst forecasts, thanks to significant cuts to earnings estimates over the past three months. However, the muted enthusiasm stems from the realization that these beats are more a result of a lowered bar than robust corporate performance.
Morgan Stanley strategists note that a substantial 7% reduction in fourth-quarter profit estimates positions US companies to report minimal growth compared to the previous year. Michael Wilson highlights that the lowered expectations increase the likelihood of yet another round of mid-single-digit earnings-per-share beat rates.
Investors keenly watch the early reports of the earnings season to gauge how companies navigate challenges such as high-interest rates and to assess the overall health of the US consumer. While approximately 8% of S&P 500 companies have reported, the majority have surprised positively, according to Bloomberg Intelligence data.
HSBC Holdings Plc concurs with the trend, foreseeing another quarter of earnings beats after a downward adjustment of expectations. Strategist Nicole Inui notes that consensus expectations anticipate a slowdown in earnings growth across sectors, excluding technology. The sectors facing the most significant erosion in expectations include commodities, healthcare, and financials.
Despite the optimistic beat rates, Michael Wilson, who maintained a bearish stance last year despite market rallies, cautions that price reactions have been relatively subdued over the past few quarters.
Looking ahead to 2024, Wilson identifies healthcare, technology, and communication services as sectors poised for the highest earnings growth. However, he warns that the rosy estimates for the year may face adjustments when anticipated rate cuts by the Federal Reserve, usually signaling an economic downturn, come into play.
