By: Thomas Martin, CFA, Senior Portfolio Manager
2023 felt like a year of growth normalization and 2024 is expected to continue with growth from the same leaders. When was the last time that earnings expectations were “normal”? That’s subject to judgement and interpretation of course, but based on the stability of the consensus estimate for a given calendar year, it’s been a while. The usual path for the consensus estimate for the S&P 500 from the start of when it is tracked to when it becomes an actual for the history books, is lower. Rarely is it flat, and even more rarely is it higher. The last time that consensus estimates had a (mostly) gentle slope downward and a reasonable rate of growth from one year to the next, (let’s call this “stability”) was 2011-2017. Growth was unexpectedly strong in 2018, stalled in 2019, and then Covid hit and it was hard to tell what was going to happen, up or down. But consensus estimates for 2023, 2024, and 2025 have been remarkably stable since January of last year.
Investors have gone where the earnings growth is and stock performance has followed. The energy and industrials sectors were the big earnings growers in 2022. Both outperformed the S&P500 that year. Communications services, consumer discretionary and information technology had big earnings declines in 2022 and they all underperformed the S&P 500 that year. 2023 was a different story. Energy earnings growth went negative and it underperformed. Industrials growth slowed and it underperformed. Communications services, consumer discretionary and technology earnings growth flipped to positive and all three outperformed.
And where do the Magnificent Seven live? Not in energy and industrials. Their stocks outperformed significantly in 2023, but not just because there was a craze for them. They were powered by earnings. The Mag 7 grew their net income by 31% in 2023. S&P500 net income grew 6%. The remaining 493 grew their net income by 1.9%.
Expectations are for strong growth to continue into 2024. With 2023 almost in the books, it looks like EPS growth for the S&P 500 for the calendar year will be about 2.5%, according to FactSet. That is expected to accelerate to 10.9% in 2024 and then 13.4% in 2025. On a net income growth basis, the Mag 7 are expected to grow 20.9% in 2024, with the S&P 500 up 8.8% and the remaining 493 up 6.1%.
What could go wrong? A lot, of course. We’ve outlined the macro issues regularly in previous spotlights. Negative developments with regard to inflation, the Fed, employment, and the consumer, to say nothing of potential changes to fiscal policy and market perceptions of risk could easily change the assumptions that go into earnings expectations.
Our equity strategies remain diversified, risk aware, and attuned to changing dynamics and fundamentals. Our process takes into account company competitiveness, quality, execution, growth and valuation. We believe these are the characteristics that result in a portfolio with prudent exposure to equities in uncertain times.
Sources: FactSet, Strategas
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