With the inflation rate having peaked in the first half of 2023 on the US economy on a relatively good footing, the 2024 US earning growth outlook is favourable for the US stock market next year.
Here is our take for 2024:
- We expect the cost-savings trend, which was dominant in 2023, to come to an end and for 2024, only a modest margins improvement can be expected
- 2024 is expected to be year of a mild economic slowdown, which will occur on relatively high interest rates; a new interest rate cycle is expected to start in the 2nd half of 2024
- Third-quarter earnings provide some evidence that firms’ earlier rounds of cost-savings are now resulting in modest margin improvements
- We anticipate a mild US slowdown next year leading to interest rate cuts in the second half of 2024
- With the economy and the consumers feeling now the full force of the cumulative monetary tightening, the end year target for the US stock market (S&P 500) is in the region of 5’000 points (10% % from the present level).
Based on a more favourable trend in 2024 than in 2023, we expect corporate earnings growth to become broad based in 2024, allowing room for broader US stocks to advance. A remarkably robust American economy produced the 1st earnings growth per share during the 3rd Quarter 2023 and we expect this trend to continue throughout 2024.
While the S&P500 performance was somehow rocky in 2023, we expected 2024 to be smother as US consumer spending should remained more constant. This occurs on the back of rising real wages, declining cost of capital, and declining inflation pressure.
2023 was the year of the US corporate profit recession. While overall results are still mixed, we expect that Q3 respectively Q4 are the start of a new stock market chapter.
For now, S&P 500 profit increases are skewed more towards goods rather than services. In fact, goods company, unlike other companies in the economy, were able to benefit from cost cuts in the short term.
Surprisingly, companies have been able to make savings to maintain and improve their margins without wide-spread redundancies. Given the economic circumstances, this is a highly remarkable result. Yet, it also shows that the economy is lean and efficient; but this particular condition may generate some headwinds once the consumers are back in the full spending mood and the companies might then lack the necessary leverage to cope with the increased demand. This is particularly the case as the labour shortage is constant ever since the outbreak of the pandemic.
Why 500 – 7 = 0 !
In 2023, investing a diversified portfolio of US stocks didn’t play out as expected. In fact, the US stock market can be decomposed into 3 segments: Meme stocks, Fang Stocks, and the remaining of the S&P500. In 2023, the extended version of Fang stock came into play. The extended list includes Apple, Microsoft, Alphabet, Amazan, Meta, Tesla, and Nvidia. They are also called the Magnificent Seven.
Through to October 31, the S&P500 less the Magnificent Seven saw no change. The few leading stock of Technology and Consumer Discretionary sectors account for all the index positive returns in 2023.
Pending the institution and the forecasting team, there are 3 to 9 interest rates cuts in 2024. Views are quite dispersed. Some expect the first to occur as soon as March and then at every meeting one, while others expected the cycle to start in June only. The 3rd group is expecting interest rate cycle to start only in September.
With the US corporate margins to grow modestly, EPS growth will be limited to around 6% to 8% in 2024. We note that our view is conservative and the below-market view which expects a 12% EPS growth. Our cautious stance occurs on the fact that it will take a little more time for the economy to offset the impact of the monetary policy.
On a side note: Recent research data suggest that a happy holiday shopping season for lenders might not end up being an especially good one. While card loans are still growing, which foreshadows well for retailers – provided they keep up with their margins, but credit delinquencies are rising above average. Are American borrowers getting closer to maxing out themselves? While the statement might bluntly overdone, we shall be trying to gauge the market’s trajectory will be parsing comments from Fed for clues about the status of consumers. Provided the central bank’s thinking on inflation and the economy will remain constant for the next quarters, the concerns around the loan delinquencies should not impact the overall economy
Alike in 2023, we expect the market to be driven the Magnificent Seven and that diversification may not provide the expected result.
Downside risks to our view
It is possible that labour markets and consumption deteriorate further in the coming month. Recent data suggest that consumers are on the edge and companies selling to the lower end of the affluent market segment are underperforming. Another population segment which suffering more than in the past are companies that cater to low-income US consumers. These companies continue to show cautious reading and therefore a classic US recession is still possible. In the case of a classic US recession, EPS and profit margins could contract and the S&P500 could decline by as much as 17%.
Tailwind to our view
A more bullish environment could be the case too. In fact, US manufacturing has held up extremely well up to now and it could be the case, especially in the event there is some US-Sino trade harmonisation, that trade recovers more quickly, offering a boost to profit growth. Investors considering this scenario as the most likely to unfold, are advised to look at the various sub-components of the ISM Manufacturing index. Another early cycle sector to look at is the semiconductor segment which is in a downtrend ever since 2022.
In the event re-accelerating US economy, EPS might grow as much as 20% and revenues by more than 6% through 2024, along with some expansion in margins.
View on Europe
Historically speaking, the European economy is following the US with a lag of about 6 to 9 months. This time round it will not be different. Also, higher corporate earnings in the European Union relative to the US have historically been the single most important factor for relative outperformance. As of today, there is no evidence available that it could happen any time soon. As of now, just two sectors are driviong the European markets, i.e., banking and automotive.
In 2023, European banks’ net interest margins expanded on the back on rising rates, which boosted earnings. But for 2024, we expect somehow the opposite to occur as the stringent financial conditions are limiting business opportunities for many. With a slower growth and a stable policy rate environment, the broader economy should be able to restart only towards 2025. On the positive side, we note that the transition to electric vehicles has been slowing in recent months, but it is still progressing. The EV opportunity is the wildcard for automakers’ profitability, but it is proving particularly tricky as high street consumers stay aside from EV business for now.
Towards the end of Q3/23, electric-vehicle sales started to decline and EV manufactures have a crucial choice to make. To compete and grab EV-market share from Tesla, they need to offer a better product (which is difficult) or alternatively to sell their products much cheaper and therefore entering and maintaining a loss-making business. Moreover, for 2024, Toyota’s re-energized hybrid plans and is entering the market with a cheaper than all-electric rivals. This alternative option may see a surge in buyers next year, in part because of new offerings by Toyota and its luxury brand Lexus.
Overall, we expect eurozone-listed firms to underperform next year. Despite the present low valuations, there are few positive elements for non-EU investors to consider Europe as better positioned than other markets.
View for EMA
In emerging markets, there is evidence of weakness amongst companies having reported their results thus far, in particular those related to the mainland China consumers.
Unsurprisingly, the real estate market will take some time to recover. The oversupply in the housing market accelerates house prices to decline further in 2024. Hong Kong property firms are expected to deliver better result in 2023 since City will return to business as usual relatively quickly.
Unlike the US, there is no inflection in earnings, the annual EPS growth is coming in at around -3% for the quarter. We expect that EPS guidance will improve during the course of 2024. Large cap Taiwanese and Korean technology companies are expected to lead the market and global manufacturing activities.