By Mike Dickson, Ph.D.
Can company profits exceed rising expectations?
First quarter 2024 earnings season kicks off this week, on the heels of reports showing both a robust jobs market and somewhat stubborn inflation.
As the chart below shows, Wall Street’s estimates for those earnings have risen sharply in the past three months—up 8.1% on average for the S&P 500 Equal Weight Index and a whopping 14.6% on average for the Bloomberg Magnificent 7 Index companies (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla).
Three-Month Percent Change in Q1 Earnings Estimates
Source: Bloomberg, calculations by Horizon Investments, as of 04/08/2024. It is not possible to invest directly in an index.
Those jumps in investors’ expectations for corporate America could be a bit of a double-edged sword. Higher estimates are a sign of strong sentiment, but the more earnings estimates are raised, the tougher it becomes for companies to top those expectations. Since Wall Street can often reward companies that beat forecasts—and punish those that meet expectations or disappoint—we’ll be looking closely at how investors reprice various stocks after earnings are released.
For now, it appears investors remain amped up about the prospects for the Mag 7 stocks. Ideally, they’ll also reward 1Q earnings beats for other S&P companies—which would signal that the market’s returns are broadening out beyond just a handful of tech stocks. Indeed, if expectations for Fed interest rate cuts continue to wane due to sticky inflation, real underlying corporate earnings growth may emerge as the main driver of where equities could go from here.
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The Bloomberg Magnificent 7 Total Return Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies. The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight – or 0.2% of the index total at each quarterly rebalance. References to indices, or other measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that any account will achieve returns, volatility or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. Indices are unmanaged and do not have fees or expense charges, both of which would lower returns. It is not possible to invest directly in an unmanaged index.
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