Earnings Growth: Fuel for the Equity Rally

As an investor, are you confused by the cacophony that emanates from the financial news media? For clarity, turn to corporate operating results. They cut through the noise. They separate hype from reality.

As super investor Warren Buffett put it: “The inescapable fact is that the value of an asset, whatever its character, cannot over the long term grow faster than its earnings do.”

With that sentiment in mind, the latest corporate earnings projections suggest that the stock market rally has long-term fuel.

Despite the potential for an economic slowdown in the coming months, analysts anticipate that the S&P 500 will post a double-digit surge in earnings during calendar year (CY) 2024, according to the latest data from research firm FactSet. For Q4 2023, the estimated year-over-year earnings growth rate for the S&P 500 is 2.7%.

Quarter by quarter, analysts foresee peak earnings growth in Q4 2024, with Q1 2024 through Q3 2024 showing respective year-over-year growth rates of 6.8%, 10.8%, and 9.0%. Q4 2024 is expected to experience an impressive 18.2% growth.

Projections indicate a year-over-year earnings growth rate of 11.8% for CY 2024, as the following chart shows:

This CY 2024 performance would surpass the trailing 10-year average annual growth rate of 8.4% (2013 – 2022). All 11 S&P 500 sectors are poised to report year-over-year earnings growth in CY 2024. Among them, five sectors are anticipated to showcase double-digit growth, spearheaded by health care, communication services, and information technology.

Health care is predicted to lead with the highest year-over-year earnings growth rate among the 11 sectors at 19.1%. Notably, all five industries in this sector are projected for a year-over-year increase in earnings.

The pharmaceuticals industry stands out with a 50% predicted growth, the sole industry expected to report double-digit earnings growth and contribute significantly to the sector’s overall earnings growth. If the pharmaceuticals industry were excluded, the estimated earnings growth rate for the health care sector would drop from 19.1% to 7.9%.

Biotech should enjoy a prosperous 2024, as innovations such as gene editing come to the fore. The increasing legalization on the state level of medical marijuana also is providing an impetus for biotech.

A major potential catalyst for marijuana-focused biotech firms awaits in Congress, which is considering legislation to legalize marijuana on the federal level.

Pending in the U.S. Senate is the Cannabis Administration and Opportunity Act (CAOA), which would federally de-schedule cannabis, expunge prior convictions, allow people to petition for resentencing, maintain the authority of states to set their own marijuana policies, and remove collateral consequences like immigration-related penalties for people who’ve been criminalized over the plant. The bill also would impose a federal tax on marijuana products.

The communication services sector is expected to secure the second-highest year-over-year earnings growth rate at 16.9%. At the industry level, four out of the five industries in the sector are projected for a year-over-year increase in earnings, with all four poised for double-digit earnings growth: entertainment (48%), wireless telecommunication services (39%), interactive media and services (18%), and media (13%).

The information technology sector is projected to report the third-highest year-over-year earnings growth rate at 16.8%. At the industry level, all six industries within the sector are expected to report a year-over-year increase in earnings, with semiconductors and semiconductor equipment (34%) and software (15%) standing out with double-digit earnings growth.

The estimated net profit margin for the S&P 500 in CY 2024, based on aggregate estimates for revenues and earnings, is 12.3%. This surpasses the estimated net profit margin of 11.7% for CY 2023 and the 10-year average annual net profit margin of 10.6% (2013-2022). If the actual net profit margin for the year is 12.3%, it will mark the second-highest annual net profit margin reported by the index since FactSet began tracking this metric in 2008. Helping lift profit margins is the rapid decline of inflation.

At the sector level, nine out of the 11 sectors are expected to report higher net profit margins in CY 2024 relative to expectations for CY 2023, with information technology (26.0% vs. 24.3%) leading the way. Conversely, the real estate sector is projected to report a lower net profit margin in CY 2024 (35.0% vs. 36.0%) relative to expectations for CY 2023.

Inflation Continues to Moderate

Further good news arrived on the inflation front. The U.S. Bureau of Labor Statistics reported Tuesday that the consumer price index (CPI) increased 0.1% on a month-over-month basis in November, and was up 3.1% from a year ago.

Excluding volatile food and energy prices, the “core” CPI increased 0.3% on the month and 4% from a year ago. A 2.3% decline in energy prices helped dampen inflation, as gasoline fell 6% and fuel oil dipped 2.7%. Food prices climbed 0.2%. Core CPI remains at its lowest level since September 2021.

Prices across a broad range of goods and services edged slightly higher in November but were mostly in line with consensus expectations, giving further leeway to the Federal Reserve, which started its two-day policy meeting Tuesday.

The favorable CPI report for November increases the likelihood that the Fed will announce another “pause” on Wednesday. Treasury yields and stocks held steady in the wake of the latest inflation numbers.

The main U.S. stock market indices closed mostly higher on Tuesday as follows:

  • DJIA: +0.48%
  • S&P 500: +0.46%
  • NASDAQ: +0.70%
  • Russell 2000: -0.13%

So the next time you hear the nattering pundits on CNBC, just keep your eye on the hard data, especially falling inflation and rising corporate earnings. The numbers bode well for investors in the new year.

Risk Management, for Prudent Bulls

I’ve just depicted an optimistic scenario for the stock market in 2024, but investment threats still lurk on the horizon. China’s economy is sputtering, wars are raging in Eastern Europe and the Middle East, and the Federal Reserve could deliver a nasty surprise on interest rates. I’m bullish about the new year, but I also counsel prudence.

If you’re looking for proven ways to make money with mitigated risk, I suggest you consider the advice of my colleague Jim Pearce, chief investment strategist of Investing Daily’s flagship publication, Personal Finance.

Founded in 1974, Personal Finance has helped investors build wealth for nearly 50 years.

Case in point: If you had taken the initial recommendation of Personal Finance to buy Chevron (NYSE: CVX), and held on, you’d be sitting on a whopping return of nearly 3,200% (that’s not a typo).

Want to get aboard “The Next Chevron?” Click here for details.

John Persinos is the editorial director of Investing Daily.

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This article originally appeared on Investing Daily.