WEEKLY MARKET RECAP
Global Equities Struggle to Maintain Momentum to Start 2024
Equities: The MSCI AC World Index was lower for the first time in 10 weeks as Treasury yields climbed amid central bank uncertainty. All major U.S. averages snapped a nine-week winning streak amid the stronger than expected employment report. Mega-cap technology stocks were under the most pressure, causing the Nasdaq to post its worst weekly loss since September. In addition, small and midcap stocks fell the most.
Fixed Income: The Bloomberg Barclays Aggregate Index was lower for the first time in six weeks as Treasury yields climbed on a better than expected jobs report and a lesser chance of rate cuts in 2024. The 10YR Treasury breached the key 4.0% level. Floating rate instruments were the only area of fixed income higher for the week.
Commodities/FX: The Bloomberg Commodity Index was relatively flat last week. Crude oil prices posted their largest weekly gain since October amid tensions in the middle east and Houthi militant attacks in the Red Sea causing uncertainty about global supply. The U.S. Dollar was higher by the most since July given the stronger than expected employment report.
4Q23 EARNINGS PREVIEW – SECOND QUARTER OF EARNINGS GROWTH
S&P 500 earnings season (for 4Q23) gets under way this week amid growing uncertainties about the Fed’s path forward and the possibility of an economic slowdown and/or recession. Investors will get their first look at bank earnings with JPMorgan Chase, Wells Fargo, and Citigroup all scheduled to report before the market opens on Friday January 12th. According to FactSet, analysts are expecting S&P 500 earnings to grow 1.3% YoY, which would mark the second straight quarter of earnings growth. However, at the end of 3Q23, analysts were expecting earnings to grow 8.0%, signifying a ~6.8% cut to expectations. While it is typical for analysts to reduce estimates during a quarter, this cut has been the largest since 2Q22.
The percentage of companies issuing negative guidance for 4Q (65%) is above the five and 10-year average. S&P 500 revenues are expected to grow 3% on a year-over-year basis, the 12th straight quarter of revenue growth. However, this is lower compared to the end of 3Q23 (3.9% YoY). In this weekly, we provide some insight to what investors can expect from earnings season.
THE BOTTOM LINE:
We expect 4Q23 earnings to post positive growth as the economy remained supported. However, our concern is that earnings for 2024 and 2025 remain too optimistic. Analysts expect earnings growth between 10-15% for both calendar years. This does not reflect our base case scenario that the economic environment will be challenged. Inflation, while slowing, is still a headwind for companies. Lastly, we believe analysts are too optimistic about the pace of rate cuts in 2024. All of these factors could put downward pressure on earnings estimates.