Q4 Earnings Season: Fading Guidance on the Horizon for 2024

As the new year kicks off, the stock market braces itself for the Q4 earnings season, marking the assessment of corporate performance for the final quarter of 2023. Major financial entities are on the roster to disclose their earnings, starting from January 12, signaling a crucial period for investors.

The weight of the Q4 earnings reports is magnified by the previous market rally that concluded 2023 on an upswing. The market trajectory largely depends on whether these reports can meet the high expectations set by last year's surge.

The Federal Reserve's recent dovish turn, suggesting up to three potential rate cuts in 2024, has bolstered the corporate outlook. Lower interest rates are traditionally a boon for corporate earnings, but the high market valuations still demand strong earnings to be justifiable.

The guidance for 2024 will be a key determinant in charting the future course of the market. Case in point, when Mobileye adjusted its Q1 2024 outlook downward due to reduced customer orders, its shares took a significant hit, dropping 25%. Similarly, lackluster iPhone 15 sales led to a downgrade of Apple's stock by Barclays, causing a slight decrease in its value to date.

Q4 Earnings: A Temperate Forecast

Q4 earnings growth expectations are modest at best, with current projections pointing to a meager 0.1% increase over the previous year's same quarter, which is a stark contrast to the 3.4% growth seen in Q3 2023. The downward adjustment in these estimates—from over 5% growth anticipated in early October to the current forecast—indicates a cautious market sentiment.

Despite these conservative estimates for Q4, the projections for 2024 remain relatively upbeat. Companies in the S&P 500 are expected to see almost 12% growth in earnings in 2024, with a sizeable chunk of this optimism pinned on a robust Q4 2024. This positive outlook, concentrated in the latter part of 2024, could be what's keeping the market optimistic for now.

Corporate Profit Margins and Market Valuations

Despite modest expectations for Q4 2023, corporate profit margins have been holding strong, and the stock market has not reached overvaluation territory. With an average corporate profit margin of 11.6% in Q3 2023, companies remain in a healthy position, especially considering the expected profit margin surge in the latter half of 2024.

The current forward price/earnings ratio for the S&P 500 is around 21, which, although slightly above the long-term average, is not indicative of an overextended market. However, these valuations heavily bank on optimistic projections for 2024, which invites a degree of skepticism.

In conclusion, a great deal of the stock market's fate in 2024 hangs on the actualization of projected earning growth. While the outlook for 2024 might help maintain market momentum, any cracks in earnings guidance or rising P/E ratios could lead to adjustments, aligning market valuations with the changing expectations.

Earnings, Guidance, Markets