Earnings expectations are stronger than earnings guidelines
According to Factset, at the mid-point of the Q1 earnings season, S&P 500 companies continue to perform well. Both the percentage of S&P 500 companies reporting positive earnings surprises and the magnitude of earnings surprises are above their 10-year averages.
Factset points out that overall, 46% of the companies in the S&P 500 have reported actual results for Q1 2024 to date. Of these companies, 77% have reported actual EPS above estimates, which is equal to the 5-year average of 77% but above the 10-year average of 74%. These figures indicate that the previous earnings guidelines may be too cautious. Our own earnings forecast indicates a slight dip in Q1.
From a top-down point of view, there seems to be another worrying sign that things may not be that encouraging for US companies in general.
The graph below shows the (y-o-y) quarterly growth of real gross fixed non-residential investment in equipment in the last 15 years. As can be seen, this type of investment growth has become negative lately. For the period 2008-2023, the correlation between the growth rates of this investment and the S&P 500 index was rather large (.68). If we ignore the period where the Ukraine war broke out, the growth rates have been generally in a similar direction. As the US consumer spending slows down, the falling investment may push the US GDP growth to a negative territory, unless the Fed quickly acts and cuts the rates.
The S&P 500 index remains overvalued
According to Factset, the forward 12-month P/E ratio was 20 on April 26. This P/E ratio is above the 5-year (19.1) and 10-year (17.8).
We expect the stock market to perform rather sideways with a modest m-o-m growth in May. After all, despite the strong economy, both PMI and consumer confidence seem at odds with the market optimism about future company earnings. The Fed is expected to refrain from a rate cut before September in the face of persistent inflation. Consequently, the driving force for Q1’s market rally is expected to weaken in May as the rates remain high.
Up to now, the US consumers were the engine of growth for the US economy. However, diminishing consumer savings in the coming months, and gloomier consumer confidence may put a damper on consumer spending. We believe that the higher-than-expected corporate earnings in Q3 and Q4 seem unsustainable in the coming quarters.
We always argued that the US economy can avert a recession in 2024 and head toward a soft landing with a one-quarter negative growth at worst. Going forward, we anticipate the S&P 500 to trade closer to its historical average in 2024. Our forecast is a modest growth for May’s average over April’s.
Our monthly S&P 500 forecast is a model-based fair-value estimate. The possible impact of the pandemic and the war is fed into the model through keyword searches (Google clicks) and the advanced retail sales index. However, these variables perform better in normal times. Our quarterly S&P 500 forecast discusses these issues in more detail.