Stock Market Gains and Earnings Season Wrap-Up

The stock market had a strong performance this past week, with the S&P 500 index rising by 0.8%. This resulted in a monthly gain of 8.9%, making it the best month since July 2022. The Nasdaq Composite also saw an increase of 0.4%, while the Dow Jones Industrial Average gained 2.4%, reaching its highest level since January 2022.

These gains can be attributed to the market's anticipation of the end of the Federal Reserve's rate hikes and the possibility of lower rates next year. According to CME's FedWatch Tool, futures pricing indicates a potential rate cut by early spring.

However, it is important to note that earnings have played a significant role in the market's success this month. The third-quarter earnings season has come to a close, with the focus primarily on retailers and some technology companies. The results from this season allow us to draw conclusions, the most evident one being that the earnings recession is now over.

Refinitiv reports that S&P 500 companies' third-quarter net income was 4.1% higher compared to the same period last year. This is a significant improvement after three consecutive quarters of declines. Earnings per share also saw a boost of 7.1%, primarily due to stock buybacks.

While earnings have improved, management teams' outlooks for the future have been more mixed. Companies exposed to U.S. manufacturing, particularly those affected by the auto workers' strike, and some retailers concerned about consumer spending sustainability have expressed caution.

As a result, analysts have adjusted their estimates accordingly. Edward Yardeni from Yardeni Research compiles the Net Earnings Revisions Index (NERI) to track trends in analysts' forecasts. A positive NERI indicates that more analysts are revising their estimates higher than lower, and vice versa.

S&P 500 NERI Turns Negative in November

The S&P 500's Net Earnings Revisions Index (NERI) experienced a downturn in November, marking the first negative reading in seven months. While the energy sector remained the only positive contributor to the NERI, experts assure that this is no cause for alarm. According to Yardeni, there is still optimism among investors, as revenue and earnings growth rate forecasts for the upcoming quarters remain positive until the end of 2024.

Strong Growth Forecasted for S&P 500 Earnings

Analysts' consensus currently projects earnings per share of $245 for the S&P 500 next year. This estimate represents a growth rate of over 11%, which is a significant improvement compared to the relatively stagnant earnings observed thus far in 2023. Despite expectations for a slowdown in the economy from this year's rapid pace, experts anticipate substantial profit growth. However, some remain skeptical of these optimistic projections.

Skepticism Towards High Earnings Estimates

Ann Miletti, head of active equity at Allspring Global Investments, expresses doubts about the projected earnings figure. She believes that achieving such high growth rates would require not only the seven leading stocks responsible for driving earnings growth in 2023 to repeat their performance but also for the remaining 493 stocks to catch up. According to Miletti, this is a formidable challenge.

Focus on Healthcare Sector's Promising Outlook

Given her reservations about overall earnings estimates, Miletti directs her attention towards sectors with robust growth potential. Healthcare emerges as a favorable choice, expected to exhibit the highest earnings growth in the S&P 500 next year at 20%. Having rebounded from a decline in 2023, the healthcare sector is praised for its resilience in uncertain economic conditions, strong balance sheets, and attractive valuations. Miletti points to Charles River Laboratories International and Laboratory Corp. of America Holdings as particularly promising stocks within this sector.

Positive Outlook for S&P 500 with Optimistic Projections

The combination of positive growth projections and anticipated lower interest rates, which would boost valuation multiples, is currently driving the upward momentum of the S&P 500. Investors seem content to focus on the present, leaving concerns about next year's earnings for the appropriate time.