- Wednesday, October 16, 2024
The stock market has been feeling the effects of persistently higher long-term interest rates, causing a dip in the major averages in recent weeks. This downwards trend has been led by what analysts are calling the "Magnificent Seven."
According to Doug Peta, the chief U.S. strategist at BCA Research, the end of the stock market's 2023 rally is fast approaching. However, he believes that this decline is not primarily driven by the course of interest rates, but rather by another important factor—corporate earnings.
At the end of last year, expectations for corporate earnings were incredibly low, setting a grim tone for the market. However, these expectations were surpassed, leading to a pleasant surprise for investors in the first half of 2023. Now, as more optimistic estimates emerge for the coming year, investors are setting themselves up for potential disappointment.
Peta provides some numerical context to these observations. Initially, investors anticipated earnings of approximately $190-$195 per share for S&P 500 companies this year. However, actual results have exceeded these expectations by around 11%. Consequently, consensus full-year estimates for 2023 have been adjusted upwards to approximately $219 per share.
With this ongoing battle between estimates and reality, the stock market's struggle continues as higher interest rates persist. The impact on corporate earnings remains a critical element to watch in the ever-changing investment equation.
Will Earnings Growth Continue in 2024?
The consensus forecast for calendar 2024 is showing impressive earnings growth, reaching a staggering $246. However, it is important to note that such long-term forecasts are essentially guesswork. Analysts base their predictions on assumptions about revenue and expenses, which can be highly uncertain.
Contrary to these optimistic predictions, Peta believes that these forecasts will fall short. Just as it was difficult to disappoint the downbeat expectations during the first half of this year, it will be challenging to exceed the projected earnings for 2024. Peta's top-down forecast conservatively suggests a decline of approximately 5%, resulting in an expected earnings per share of around $210 for the S&P 500 next year.
With these figures, the big-cap benchmark would still comfortably exceed a price/earnings ratio of 20 for the forthcoming calendar year. However, the rise in interest rates is likely to exert pressure on this ratio. Lower earnings combined with reduced P/E ratios do not bode well for stock prices, particularly as we enter the most unpredictable time of the year, September and October.
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