Q1 earnings season preview – more growth ahead to support US markets
Earnings season begins in April, and is expected to see a third consecutive quarter of growth in earnings, helping to support the S&P 500 at record highs.
For the first quarter (Q1) of 2024, S&P 500 companies are expected to report earnings growth of 3.4% year-over-year and revenue growth of 3.6%. This marks the third consecutive quarter that the index is projected to report year-over-year earnings growth.
While the overall earnings growth forecast is positive, analysts have lowered their Q1 earnings estimates by 2.6% since December 31st. This downward revision is below the historical average cut to estimates, which ranges from 3.4% over the last 10 years to 3.9% over the past 20 years.
However, companies themselves have been more pessimistic in their earnings outlooks. At this point, 70% of the S&P 500 companies that have issued Q1 earnings guidance provided negative guidance, which is above the 5-year and 10-year averages.
Strength in IT & consumer discretionary, weakness in energy
Breaking it down by sectors, six of the eleven sectors are expected to report year-over-year earnings growth in Q1, led by the Utilities, Information Technology, Communication Services, and Consumer Discretionary sectors.
On the other hand, four sectors are predicted to report a year-over-year decline in earnings, with the Energy and Materials sectors seeing the largest declines at -27.1% and -23.4% respectively. The Industrials sector is expected to report flat earnings growth of 0%.
Looking further ahead, analysts are forecasting earnings growth of 9.3% for Q2 2024, 8.4% for Q3 2024, and a robust 17.4% for Q4 2024.
Valuation remains above average
The forward 12-month price-to-earnings (P/E) ratio for the S&P 500 currently stands at 20.9, which is above the 5-year average of 19.0 and the 10-year average of 17.7. This elevated valuation ratio reflects the strong price performance of the index.
Despite historically overestimating gains, industry analysts are projecting the S&P 500 price will increase by 7.0% over the next 12 months based on their target prices for individual stocks. This projected increase is supported by the positive earnings growth forecasts for the coming quarters.
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