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#63 - S&P 500 Q3 Earnings Take-Aways and Perspectives for 2024

“All intelligent investing is value investing, acquiring more than you are paying for. You must value the business in order to value the stock.”  Charlie Munger, 1924 – 2023.


FACTSET Research noted last week:

  • As of Q3 2023, with 98% of S&P 500 companies having reported their actual results, 82% reported a positive EPS surprise, while 62% exceeded revenue expectations.

  • The blended year-over-year earnings growth rate for the S&P 500 in Q3 2023 stands at 4.8%. The third quarter will mark the first quarter of year-over-year earnings growth reported by the index since Q3 2022.

  • The forward 12-month P/E ratio for the S&P 500 is 18.7. This P/E ratio is below the 5-year average (18.8) but above the 10-year average (17.6).

MACROMETR strategists suggest that these figures are only achievable if the Federal Reserve implements four rate cuts over the next year. Additionally, existing research indicates that over the past 25 years (1998 – 2022), the average difference between the bottom-up EPS estimate at the beginning of the year (December 31) and the final EPS number for that same year has been 6.9%. In other words, industry analysts, on average, have overestimated the final EPS number by 6.9% one year in advance.

Analysts project earnings growth of 11.4% in 2024 and 11.8% in 2025. The consensus is that earnings will still be slightly depressed for the 4th quarter but will continue to improve throughout 2024. Results show that analysts overestimated the final value (the final value finished below the estimate) in 17 of the 25 years and underestimated the final value (the final value finished above the estimate) in the other 8 years.

Given market concerns about a potential economic slowdown or recession, analysts have significantly reduced EPS estimates for S&P 500 companies in the fourth quarter. In October and November, analysts lowered Q4 EPS estimates by a larger margin than usual. The bottom-up EPS estimate for Q4 2023, an aggregation of median estimates for all index companies, decreased by 5.0% (from $57.86 to $54.95) from September 30 to November 30.

At the sector level, ten of the eleven sectors saw a decline in their bottom-up EPS estimate for Q4 2023 from September 30 to November 30, with the Health Care sector leading the decrease at -19.9%. Conversely, the Information Technology sector showed resilience with a +1.5% increase in its Q4 2023 bottom-up EPS estimate during the same period.

Turning to European markets, reported results indicate a slower recovery compared to their U.S. counterparts. Only about half of the companies in the Euro Stoxx 600 Index have reported third-quarter results, with expectations that 11.4% of them will announce lower year-on-year earnings, coupled with a projected 7.7% decrease in sales.

Amid earnings season, sentiment towards Asian companies has softened, reflecting the impact of China's economic slowdown. Some 2024 estimates were revised downward, though the outlook varies widely at both the country and company levels. Despite the challenges, there is an overall expectation of recovery, especially in Korea, Taiwan, and Thailand, where a reversal in booked profits and subsequent earnings improvement is anticipated. Notably, China's economic conditions play a crucial role as the biggest trading partner for these economies.


… and of course, about Artificial Intelligence.

Reports indicate that some emerging markets are beginning to reduce their reliance on China, reflecting a shift in economic dynamics.

Shifting focus to the tech landscape, artificial intelligence (AI) has been a prominent topic in recent months. To gauge the industry's interest, FactSet Document Search analyzed conference call transcripts for all S&P 500 companies conducting earnings calls from September 15 through November 30. During the third quarter, 152 companies mentioned the term "AI," marking a 16% decrease compared to Q2 2023, where 180 companies cited it during their earnings calls.


The significant growth observed in the second quarter is likely to continue its 'decompression' phase into December, though overall prospects for the quarter remain positive. The forward P/E ratio for the S&P 500 is 18.7 (almost in line with the 5-year average of 18.8, better than the 10-years average of of 17.6) while the sectors winning the best 12-months forward P/E ratios are Information Technology (26.2) and Consumer Discretionary (24.4).


Bottom line

The outlook for 2024 is still fraught with uncertainties, and investors remain cautious. Despite this uncertainty, Q3 witnessed another resilient quarter on the earnings front, reaching a multi-quarter high in the earnings beat rate.

US stocks, especially large-cap ones, appear poised for further gains into 2024, although Q4 guidance numbers have started softer compared to earlier quarters. As of December 7, 2023, there have been 50 negative announcements and 25 positive announcements. Concerns arise as fewer companies beat revenue expectations compared to Q3, raising questions about pricing power post-pandemic. MACROMETR strategists highlight negative real revenue growth (adjusted for inflation) for the fourth consecutive quarter, with a y/y growth of +1.4%, the second lowest since 2020 Q4.

Despite a favorable November, buoyed by optimistic inflation, growth, and earnings data, alongside lower oil prices and falling bond yields, MACROMETR anticipates increasing headwinds. Factors such as a potential inflation rebound and thus monetary policy staying tighter for longer, another rise in energy costs as OPEC extends production cuts, higher risk premium for US bonds amidst a significant pick-up in issuance and US domestic demand weakening as the consumer has fully depleted its excess reserves, are not fully accounted for in the market. These factors should be closely monitored for potential impact on market dynamics.

Good Luck

Team MacrometR


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