JPMorgan strategists said consensus projections for earnings growth have been “moving materially lower” in recent months ahead of the Q1 2024 reporting season kick-off.
Currently, the S&P 500 is expected to see a 3% year-over-year earnings per share (EPS) growth rate, a sharp drop from last summer's 10-12% forecast. In Europe, the expected Q1 year-over-year growth rate is -11%, with a median of -1% after adjusting for outliers.
Excluding the Magnificent 7, the S&P 500's EPS growth is projected at -2.6% year-over-year, marking the fifth consecutive negative quarter, JPMorgan highlighted.
Despite declining earnings forecasts, there has been a notable shift in activity momentum during the quarter, evidenced by rising global purchasing managers indexes (PMIs). This improvement, alongside the lowered earnings hurdle due to reduced forecasts “is suggesting that we will get earnings beats,” strategists at JPMorgan said in a Monday note.
However, this does not necessarily signal that the US stock market will move higher if earnings data outperforms expectations.
“This is because the market has already strongly rerated during Q1, and the big gap has opened up ytd between Fed projections and equity index levels,” said strategists.
“The risks of interest rates spiking for the “wrong reasons”, Fed pivot getting fully reversed and inflation staying too hot are all elevated,” they added.
Further, geopolitical uncertainties remain volatile and any de-escalation could be temporary. These factors suggest that while earnings beats are crucial, they may primarily serve to support a market where risk premia have already been significantly compressed, strategists explained.
In addition, consensus expectations predict a sharp increase in earnings over the coming quarters, with S&P 500 earnings projected to rise nearly 20% from $55 in Q1 to $65 by Q4. However, this ambitious growth trajectory faces risks of disappointment as 2024 EPS projections “keep moving lower in most regions,” strategists at JPMorgan noted.