As we stand on the cusp of 4Q 2023 earnings season, the spotlight turns to large-cap Financials with bellwethers like BAC, BK, BLK, C, JPM, and WFC set to report on January 12, alongside DAL and UNH. This marks a crucial phase as 74% of S&P 500 market cap is expected to have released results by February 9th, shaping a comprehensive view of the U.S. macroeconomic landscape.
Reflecting on the consensus, there’s a palpable sense of optimism not seen since 3Q 2022. Analysts anticipate a 3% year-over-year growth in 4Q profits for the S&P 500 index. This outlook sets a higher benchmark for positive surprises, especially considering the recent trend where actual earnings outstripped expectations despite conservative forecasts.
Drilling down to the sector level, Utilities, with an expected +47% year-over-year EPS growth, lead the pack, while Energy faces a -28% decline. This divergence speaks volumes about the sectoral shifts within the economy. Notably, mega-cap tech sectors like Communication Services, Consumer Discretionary, and Information Technology also project robust growth, signaling continued strength in technology and consumer spending.
On the sales front, a 3% growth is expected, paralleled by a 14 basis point year-over-year margin contraction. Real U.S. GDP growth tracking at a 1.4% annualized rate and a 2% lower USD in 4Q 2023 compared to 4Q 2022 hint at potential for positive sales surprises. However, sectors tied to commodities like Energy and Materials might not share this uptrend due to a 7% drop in Brent crude prices, impacting both sales and margins.
A closer look at S&P 500 margins reveals a consensus forecast of 90 basis points sequential contraction, which, in my view, might be overly pessimistic. Consumer Discretionary sector, particularly Autos and Retail, is expected to see the largest margin deterioration. Yet, companies like Ford and GM are showing resilience, balancing increased labor costs with higher productivity and strategic product launches, especially in the EV market. Retail giants like Home Depot, TJX, and Nike also exhibit robust margin management strategies.
Looking ahead to 2024, the EPS revisions for S&P 500 are more favorable compared to 2023, with Information Technology being the only sector with positive revisions since the start of 4Q 2023. In contrast, Materials and Industrials have seen significant cuts in their 2024 EPS estimates. Under our baseline forecast, we anticipate a 5% year-over-year EPS growth for S&P 500 in 2024, driven by sales growth and margin expansion, potentially outpacing the median strategist estimate.
The macroeconomic factors play a pivotal role here. U.S. economic growth significantly influences S&P 500 EPS growth, with our economists forecasting an above-consensus real GDP growth of 2.3% in 2024. This optimistic view is bolstered by strong consumer spending and easing financial conditions.
Inflation trends also carry substantial weight. Goldman Sachs economists foresee below-2% core PCE inflation in 2024, a mixed blessing for corporate earnings – a potential sales headwind but a margin tailwind. Lower input costs, including wages growing slower than prices charged, could further buoy margins.
Interest rates, another critical factor, see a downward revision in forecasts, which could ease concerns over higher interest expenses and support EPS growth through increased corporate buybacks.
Oil prices, with a revised Brent crude forecast of $80/bbl for year-end 2024, generally benefit most sectors except the Energy sector. Yet, a lower Brent crude price is a downside risk for aggregate S&P 500 EPS.
Lastly, the expected broad-based dollar depreciation in 2024 adds another layer of complexity, potentially boosting revenue growth for U.S. firms with significant overseas sales.
In sum, the U.S. macroeconomic landscape appears cautiously optimistic as we step into 2024, with various sectors poised to navigate through shifting economic currents. While challenges remain, particularly in commodities-linked sectors, overall, the resilience and adaptability of the U.S. economy and its corporate sector continue to be the guiding forces in these uncertain times.
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Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Monday, January 08, 2024The week is set to start without any high-impact economic releases on Monday. Attention will be on the Consumer Credit report for November, which, despite being classified as a low-impact event, is pivotal in understanding consumer spending habits and credit usage trends in the U.S. economy.
Tuesday, January 09, 2024 Tuesday will feature the Trade Balance for November, a medium-impact event. This key economic indicator measures the differential between the value of a country’s imports and exports. It is an essential gauge for assessing the United States’ economic interactions with the global market. The forecast anticipates a deficit of -$64.7 billion, marginally exceeding the previous figure of -$64.3 billion.
Wednesday, January 10, 2024 On Wednesday, the spotlight will be on the EIA Crude Oil Inventories as of January 6, marked as a high-impact event. This report is critical as it offers insights into the supply and demand dynamics in the oil market, with potential repercussions on energy prices and broader economic conditions. The previous reading indicated a decrease of 5.50 million barrels, underscoring its importance for energy markets and economic analysis.
Thursday, January 11, 2024 Thursday’s agenda includes several high-impact events. The Consumer Price Index (CPI) for December, a vital inflation indicator, will be closely watched. The CPI tracks changes in the price level of a market basket of consumer goods and services. The expectation for December’s CPI is an increase of 0.2%, aligning with Briefing.com’s forecast and showing a rise from the previous 0.1%. The Core CPI, which excludes volatile food and energy prices for a more stable inflation measure, is also anticipated to rise by 0.2%, in line with the forecast but lower than the previous 0.3%. Additionally, Initial Claims for the week ending January 6 will offer timely insights into the labor market’s health, with forecasts indicating 213,000 claims, slightly above the Briefing.com forecast but below the previous week’s figure. Continuing Claims for the week ending December 30 will provide further perspective on the labor market.
Friday, January 12, 2024 The week concludes with high-impact data releases including the Producer Price Index (PPI) for December. This indicator, measuring the average changes in prices received by domestic producers, is a crucial barometer of inflation at the production level. The PPI is expected to register a 0.1% increase, mirroring the Briefing.com forecast and surpassing the previous flat reading. The Core PPI, excluding food and energy, is also forecasted to rise by 0.1%, slightly below the Briefing.com expectation of 0.2%.
The forthcoming week promises to provide a comprehensive overview of the U.S. economy, encompassing aspects ranging from consumer behavior and trade to energy, inflation, and the labor market, all of which are integral in shaping the economic landscape for 2024.
Briefing.com
Last Week’s Numbers
Review Last week’s numbers here.
Global Spotlight
Bangladesh’s Tense Elections Bangladesh is set to hold its general elections on January 7, with the ruling Awami League vying for a fifth term under Prime Minister Sheikh Hasina’s leadership. The lead-up to the elections has been marked by significant unrest, including violent incidents and strict government actions against dissenters. The opposition Bangladesh Nationalist Party, citing electoral manipulation, has chosen not to participate, potentially fueling further unrest post-election. This situation could disrupt transportation, supply chains, and business operations, exacerbating the country’s economic and political challenges. The mass detention of opposition figures could influence the sustainability of protests. International concern, particularly from the United States and the European Union, has been raised over the political turbulence and allegations of electoral unfairness, urging Bangladesh to uphold democratic and transparent electoral processes.
U.S. Diplomacy in Middle East U.S. Secretary of State Antony Blinken embarked on a significant Middle East tour on January 4, amidst the ongoing Gaza conflict. The visit follows the January 2 Israeli assassination of a Hamas member in Beirut, heightening tensions with Hezbollah. The U.S. is urging Israel to de-escalate its Gaza operations, especially as the 2024 U.S. presidential campaign intensifies. Israel faces internal and external pressures regarding its Gaza strategy, with Western and Arab allies favoring Palestinian governance there, while Israeli far-right factions push for resettlement plans, a stance Prime Minister Benjamin Netanyahu is reluctant to support fully. Blinken’s visit also aims to address regional concerns, including the situation in the Red Sea, where the U.S. has warned the Houthi movement against attacks on crucial maritime trade routes.
Israel Faces ICJ Case The International Court of Justice (ICJ) is set to commence initial hearings on January 11-12 regarding South Africa’s case against Israel, accusing it of genocide in the Hamas-Israel war. Israel has refuted the allegations and is prepared to defend itself in court. South Africa’s initial request to the court was for provisional measures to cease Israel’s military actions in Gaza. Israel, asserting the elimination of Hamas as a war goal, is unlikely to reduce or stop its operations in Gaza, regardless of the court’s directives. However, an adverse ruling could impact Israel’s global reputation.
Astrobotic’s Lunar Mission Astrobotic, a U.S. space company, is scheduled to launch its Peregrine Mission One on a United Launch Alliance Vulcan Centaur rocket on January 8. This mission is pivotal for Astrobotic as it aims to achieve the first private space company’s soft landing on the Moon, marking a significant milestone in the commercialization and exploration of space. The launch is also crucial for the Boeing-Lockheed joint venture, United Launch Alliance, as it represents the inaugural flight of the Vulcan Centaur rocket, replacing their older rocket models.
Stratfor.com
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