The Stock Market’s March to New Highs

Companies aren’t receiving much credit for surpassing lowered earnings estimates this quarter. It’s like watching a basketball player at the YMCA only managing to dunk on a lowered rim. However, this hasn’t hindered the stock market, which continues to reach new heights.

Record-breaking Performance

In a holiday-shortened week, the S&P 500 index rose by 1.17%, closing at a new record high for the first time since January 2022. The Dow Jones Industrial Average also saw an increase of 0.72%, reaching its own new high. Additionally, the Nasdaq Composite experienced a significant boost of 2.26%.

Mixed Results for U.S. Bank Stocks

Following the release of their fourth-quarter 2023 earnings reports, U.S. bank stocks mostly declined. These declines were primarily due to substantial charges incurred in repaying regulators for supporting failed regional banks’ deposits last year. On the other hand, semiconductor stocks had a strong performance, especially after Taiwan Semiconductor Manufacturing, the world’s largest chip maker, provided an optimistic forecast for the upcoming year.

Investors Remain Unimpressed

Despite many companies exceeding consensus earnings-per-share estimates, investors have shown little enthusiasm. Out of the 43 S&P 500 companies that reported by Thursday morning, 88% beat estimates. However, 60% of that group experienced a decrease in stock value on the following day, and 72% of them have underperformed the index since their reports. According to Christopher Harvey, Wells Fargo Securities’ equity strategy head, this reaction aligns with the expectation that earnings season would serve as a sell-the-news catalyst due to conservative 2024 outlooks.

Optimism Amidst Initial Reactions

Nevertheless, the bulls in the market are anticipating a lift from earnings throughout the year, regardless of the initial market response. Wall Street’s consensus predicts an 11% growth in S&P 500 earnings per share for 2024. Such growth would help support the index, which is currently trading at approximately 20 times forward earnings.

Tentative Management Outlooks

While investors remain skeptical, management teams have adopted a more cautious approach. During her company’s earnings call on Thursday, J.B. Hunt Transport Services President Shelley Simpson expressed her outlook on the challenging business environment, emphasizing signs of improvement amidst uncertainty regarding potential turning points.

Earnings Season Brings Caution Amidst Macroeconomic Volatility

Goldman Sachs Group CEO David Solomon and Nike CEO John Donahoe have both expressed concerns about the current business landscape. Solomon stated that his company is adopting a cautious approach while managing its operations, emphasizing the need to be prudent. Donahoe, on the other hand, warned about the challenges presented by a “highly promotional environment,” increasing macroeconomic volatility, and more careful consumer behavior.

The worry for investors is that these negative sentiments from management teams may have an adverse impact on the estimated earnings for 2024, just as it did for the fourth quarter of 2023. Analysts initially predicted an 11% year-over-year EPS growth for the final quarter of 2023, but that forecast has now dropped to 4.5%, underscoring the potential for a downward revision in future earnings expectations.

If this pattern continues throughout the year, it could pose significant problems. Companies typically do not receive much credit for surpassing conservative expectations that were based on pessimistic assumptions. This is in stark contrast to the previous quarter, where there was a sense of optimism due to the U.S. economy’s impressive growth rate of 4.9% and the end of a negative earnings comparison streak.

However, it remains uncertain how the current earnings season will unfold. Over 70 S&P 500 companies, including well-known names such as Tesla, AT&T, Johnson & Johnson, Visa, General Electric, and Intel, are scheduled to release their earnings reports in the coming week. The following week will be even busier, with a quarter of the index’s components making their results public, including Microsoft, Apple, Exxon Mobil, Boeing, and Qualcomm.

As we are still in the early stages of earnings season, it is vital to monitor how it progresses. The outcome will play a crucial role in setting the tone for the remainder of 2024, as well as determining whether the market can sustain its current upward trajectory.

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