(News Bulletin 247) – Profits of S&P 500 listed companies are expected to accelerate in 2024 thanks to an easing of inflationary pressures, despite a slowdown in economic growth.

U.S. corporate profits are expected to accelerate this year amid falling inflationary pressures and interest rates, analysts say, but slowing economic growth is raising doubts about their prospects.

According to analyst estimates compiled by LSEG (London Stock Exchange Group), profits of companies in the S&P 500 index are expected to increase overall by 11.1% in 2024, after a modest increase of 3.1% last year.

The S&P 500 currently trades at 19.8 times the 12-month expected earnings of its constituent companies, well above its long-term average of 15.6, according to data from LSEG Datastream.

Sustained growth in corporate profits is therefore necessary to justify such a valuation, which notably benefited at the end of 2023 from announcements by the American Federal Reserve (Fed) paving the way for a reduction in interest rates this year.

High interest rates, a cause for concern

The three main Wall Street indices notched nine consecutive weekly gains at the end of 2023, allowing the Dow Jones to end the year as a whole up 13.7%, while the S&P 500 and the Nasdaq jumped respectively by 24.2% and 43.4%.

“Current valuation levels require strong earnings growth next year,” said Sameer Samana, market strategist at Wells Fargo Investment Institute. He notes, however, that the persistent effect of high interest rates on the economy will be a cause for concern for 2024.

Official data confirmed in December that economic growth in the United States accelerated in the third quarter, with gross domestic product (GDP) up 4.9% at an annualized rate. But the fourth quarter could prove more difficult given the profit estimates published by certain companies and the indications given for the first quarter of 2024 and the rest of the year.

“We clearly see these (first quarter) estimates weakening at a faster rate,” said Nick Raich, chief executive of The Earnings Scout. “A group like FedEx is a good indicator of the global economy,” he added.

FedEx shares fell 12.1% on December 20, the day after the group published package deliveries and quarterly profit below analysts’ expectations as well as a lowering of its sales forecast. business for the whole year.

Estimated year-over-year earnings growth for S&P-500 companies for the first quarter of 2024 is now 7.4%, up from 9.6% reported on October 1, according to LSEG data. For the fourth quarter of 2023, profits for S&P 500 companies are expected to have increased 5.2%, a slowdown from the 11% growth seen on October 1.

AI support factor

Investors, however, see the slowdown in inflation as a very positive element for businesses in 2024. “The consumer still seems in good shape, inflation is improving, employment remains solid, interest rates should fall and gas prices at the pump are falling,” says Gary Bradshaw, portfolio manager at Hodges Capital Management.

Furthermore, “these companies have streamlined their operations and the margins are decent,” he added.

Prices in the United States fell in November for the first time in more than three and a half years, bringing annual PCE inflation below 3%, according to the latest official data.

Outlook on the potential of artificial intelligence (AI) is expected to continue to support businesses.

“If the rebound in new technologies began in the second quarter of 2023, the rest of the market should follow over the coming year,” Jonathan Golub, chief US equity strategist at UBS Investment Research, wrote in December. subject of corporate profits.

The “Magnificent 7” group, made up of stocks with large market capitalization – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla – represented 62.18% of the total return of the S&P 500 in 2023, calculates Howard Silverblatt, a analyst specializing in indices.

Additionally, the Fed’s recent dovish turn has strengthened the case for a weakening dollar, which would make U.S. exporters’ products more competitive abroad.

But as the profit forecasts for 2024 are based on a perfect alignment of too much data, doubt remains permissible for some analysts.

“The market is assuming a near-perfect landing with inflation slowing without a significant impact on demand and pricing power – which is not likely in our view,” JPMorgan equity strategists write in their outlook for 2024.

(With Reuters)