Will S&P500 Companies Achieve Record-Breaking Earnings? "Beware of Excessive Optimism"

This year’s expectation that the U.S. economy will achieve a soft landing and that Standard & Poor's 500 (S&P500) companies will deliver record-breaking earnings has been deemed overly optimistic. Amid the inflation slowdown and hopes for interest rate cuts, the U.S. stock market is filled with 'rosy forecasts,' but given last year’s significant gains, a period of consolidation may be imminent.

According to Bloomberg’s 'MLIV Pulse Survey' conducted from the 1st to the 5th of this month (local time), which surveyed 380 asset management analysts and investors, 50% of respondents rated the forecast that S&P500 companies will set all-time high profits this year as "too high."

Bloomberg described this as "a disappointing survey result for investors expecting blockbuster earnings in 2024." The reason respondents are concerned about S&P500 earnings this year is that the risk of an economic slowdown still looms.

Goldman Sachs forecasts that the earnings per share (EPS) of S&P500 companies will rise by 5% to $237 this year. Goldman Sachs also predicted that the upcoming Q4 2023 corporate earnings reports, to be released this week, will "generally exceed analyst expectations."

The stock prices of S&P500 companies have already surged significantly. Last year, the S&P500 index rose by 24%. The price-to-earnings ratio (PER) based on expected 2024 earnings for S&P500 companies is about 19.2 times, which is higher than the five-year average of 18.9 times. Bloomberg noted that "corporate earnings may not be the key catalyst for stock market gains this year."

Regarding U.S. consumer spending, 40% of respondents predicted that a slowdown in growth could lead to a mild recession. Thirty-eight percent expected consumer patterns this year to be similar to last year, while the remaining 22% forecast that consumer spending growth will remain steady. Respondents advised investing mainly in value stocks such as JPMorgan and ExxonMobil this year, given the possibility of reduced consumer spending. Bloomberg added that "the preference for value stocks suggests that last year’s stock market boom, driven by the 'Magnificent 7' growth stocks, may have ended."

The biggest gainer in last year’s Nasdaq 100 index was Nvidia, the leading artificial intelligence (AI) semiconductor company. It closed last year at $495 per share, more than tripling from the beginning of the year. Eighty-six percent of respondents believe Nvidia’s stock price will not reach $1,000 this year. Europe’s largest financial institution, HSBC, recently shifted its rating on Nvidia stock from overweight to tactical underweight.

Investment strategists expect the stock market to rebound even if a short-term correction occurs this year. Thirty-one percent of respondents plan to increase their weighting in the S&P500 starting next month, which is the highest level since the MLIV Pulse survey was conducted in August 2022 (28.7%).