CIO Strategy BulletinArticle07 Apr 2024

High Expectations Meet High Earnings

CIO Strategy Bulletin

When fundamentals live up to expectations, markets can maintain and grow value.

Key takeaways from this week's bulletin:

  • Earnings Matter: Corporate earnings periods are full of news about companies that exceeded, met, or disappointed relative to expectations. On a macro basis, we expect “good news” for earnings. Listening to CEOs, we hear that more large US firms are optimistic about their 2024 outlook. We find the confidence measure to be correlated with EPS surprises. This might not please investors in some highly valued and interest-rate sensitive shares. However, we see improving earnings “breadth” as a key market dynamic in 2024.
  • First Quarter Earnings Matter: Earnings season is back in full swing, and we expect Q1 S&P 500 earnings per share (EPS) to beat current estimates by 6%. We had earlier revised our full year EPS estimates upward to 8% from 6% previously and we remain convinced that there will be improved earnings breadth this year. 
  • Banks Take the Lead: Banks have outperformed the S&P 500 over a trailing 1-, 3-, 6-, and 12-month basis. On a top-down basis, an improving economic picture typically bodes well for this economically sensitive sector. Financials have historically been the best performing sector in the 12 months after ISM Manufacturing tops 50, which it did on April 1st. The highest quality banks are, for now, likely to maintain their steady cadence of dividend increases while boosting buybacks. 

Potential Portfolio Implications

When markets have rallied hard, as they have over the last six months (the S&P 500 is +25% since the October 2023 lows), it is natural to wonder if the good news is sustainable. While it is unlikely such heady gains are repeatable, we believe there is good earnings data ahead. When fundamentals live up to expectations, markets can maintain and grow value.

AI Broadens Out: Listen for a continuation of AI-related hype. With leading AI winners in the tech sector posting parabolic gains, investors have been looking for other ways to play the AI theme. Expect executives at leading energy, utilities, and electrical equipment companies to reference their own AI strategies. AI topics have evolved from chips to drive demand for computational power to power itself. The energy and electricity capacity needed to power data centers that enable AI computing will receive great attention.

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